Wall Street Week Ahead: Clouds may be parting for dividend investors

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(Reuters) – U.S. companies are cutting their dividends less than investors anticipated, providing a potential boost to a stock market rally that has clashed with concerns over a recent surge in coronavirus infections.

S&P 500 companies are likely to see an aggregate 2% decline in 2020 dividend payments, compared with analyst projections earlier this year of around 10%, according to S&P Dow Jones.

That’s good news for income-seeking investors at a time when a series of rapid interest rate cuts by the Federal Reserve has taken U.S. Treasury yields to near zero, sending market participants further afield in search of steady payouts.

“We saw a devastating amount of dividend cuts, but the second half of the year does look a bit better,” S&P Dow Jones analyst Howard Silverblatt said.

U.S. financial markets are closed on Friday for the July 4th holiday. On Monday, data firm IHS Markit reports its surveys of U.S. business activity, while Walgreens Boots Alliance Inc (O:WBA) reports quarterly results on Thursday and U.S. initial jobless claims are also due out that day.

S&P 500 companies slashed or suspended over $40 billion in dividends in the second quarter, the deepest quarterly drop since 2009, according to S&P Dow Jones. The cuts tapered off in the latter part of the quarter as the U.S. economy began to rebound, fueled by Fed stimulus and easing lockdowns across the nation. (Graphic: S&P 500 annual indicated dividend rate, https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjlbmrvr/pvGG3-s-p-500-annual-indicated-dividend-rate%20(2).png)

“The hope is that we have turned a corner, but that is going to depend on the reopening of the economy,” Silverblatt said.

The fall in Treasury yields to historic lows has raised the allure of stock dividends, which are generally paid four times a year.

The gap between the S&P 500 dividend yield and the 10-year Treasury (US10YT=RR) yield in March hit a high not seen since at least the 1970s, according to Datastream data, which does not go back further. Currently, the S&P 500’s dividend is nearly 2%, compared with the benchmark 10-year U.S. Treasury’s 0.67% yield.

(Graphic: S&P 500 dividend yield beats U.S. Treasuries, https://fingfx.thomsonreuters.com/gfx/mkt/gjnvwwjnzvw/Pasted%20image%201593623286232.png)

Jake Dollarhide, chief executive of Longbow Asset Management in Tulsa, Oklahoma, has been buying shares of dividend-paying companies that have also been outperforming in the epidemic, including Johnson & Johnson (N:JNJ), Campbell Soup (N:CPB), General Mills (N:GIS), and retailers Costco Wholesale Corp (O:COST) and Walmart (N:WMT).

Johnson & Johnson, which is among companies rushing to develop a coronavirus vaccine, raised its dividend in April. In June, Kroger (N:KR) and Target (N:TGT), which have been seeing more business with people staying at home, (N:TGT) upped their dividends.

“I have plenty of older clients who only want dividend stocks,” Dollarhide said. “There are plenty of COVID-19 dividend plays,” he added.

With California, Texas and many other states reporting record increases in new cases of COVID-19, the pandemic’s trajectory remains the main source of uncertainty of whether more companies will suspend or cut their dividends.

Over 40% of the United States has now reversed or placed reopenings on hold, analysts at Goldman Sachs (NYSE:GS) said in a recent note.

Adding to uncertainty about future dividends, the Fed last week capped big-bank dividend payments and barred share repurchases until at least the fourth quarter after finding lenders faced significant capital losses when tested against an economic slump caused by the coronavirus pandemic.

Wells Fargo (N:WFC) shares have fallen about 1% since late Monday after the bank warned it would reduce its dividend as a result of the Fed’s annual bank stress tests.

Still, only three S&P 500 companies decreased or suspended their dividend payments in June, while six companies upped their dividends, according to S&P Dow Jones.

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