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A Dicey Year for Dividends

Whether you’re a retiree or a brand-new, long-term investor in the stock market, dividends matter, notes Ryan Ermey, Kiplinger’s Personal Finance.

From the beginning of 1930 through 2019, the compound growth of reinvested dividends accounted for 42% of the total return of Standard & Poor’s 500-stock index, according to Hartford Funds. For those investors who do live on the income generated from their portfolios, a major shake-up among corporate payouts means a major loss of income at a time when it’s hard to come by elsewhere.

When the COVID-19 shutdown brought revenues in some industries to an abrupt halt, many firms had little choice but to retain money they otherwise would have paid out. So far this year, 53 firms in the S&P 500 have suspended or cut their dividends. The industries that have seen the most cuts are the ones directly affected by local stay-at-home orders, such as automakers, hotels, retailers, restaurants and energy companies.

How low can they go? BofA Securities strategist Savita Subramanian expects a 10% drop in S&P 500 dividend payouts this year. That’s a more bullish outlook than some strategists forecast, and such a drop would be a far cry from the 23% trim in dividends during the 2008-09 financial crisis.

Investors looking for safe and rising dividend payouts are likely to find them among technology and health care firms, as well as those that make essential consumer goods that people continue to buy amid the pandemic, says Tom Huber, manager of T. Rowe Price Dividend Growth fund. Even in those promising sectors, you should look under the hood to assess the sustainability of a stock’s payout.

Companies with the safest dividends will have ample cash and little to no debt. Look for firms with a history of steady earnings growth that generate lots of free cash flow and sport low payout ratios (dividends as a percentage of earnings). The average S&P 500 firm currently distributes 44% of earnings via dividends – lower than the historical average of 57%. Of the following companies, some provide a modest yield but have prospects for dividend growth; others deliver high current income.

All of their payouts look safe.

Microsoft (MSFT) should continue to enjoy robust growth in its cloud-based business, which analysts at investment firm CFRA estimate now accounts for more than half of the firm’s revenues.

United Healthcare (UNH) has hiked its payout by an average of 24% per year over the past decade, and it affirmed its payout in March. Wall Street analysts expect the firm to increase earnings by nearly 8% in 2020.

NextEra Energy (NEE) is a conservative dividend payer among utilities providers in the S&P 500, which yield 3.6% on average. But the firm’s payout is reliable and grows reliably.

J.M. Smucker (SJM) produces a portfolio of pantry staples. Columbia Dividend Opportunity fund comanager Dave King views Smucker as a beneficiary of home quarantines.

Editor’s Note: Ryan Ermey is an associate editor at Kiplinger’s Personal Finance magazine, www.Kiplinger.com.

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