A recent analysis of the Dividend Payout Ratio of the US S&P500 shows - with some variation obviously - a historical downward trend since the 1920s. What is worse, the yield on the S&P 500 is now only around 1.9%. If the payout ratio reverted to its 20th-century average, the yield would be closer to 4%, or more than double the current yield on 10-year Treasury bonds.
The analysis is provided by Motley Fool:
- For most of the 20th century, companies paid out the majority of their earnings as dividends to shareholders
- Things began to change around the 1960s, when corporate management decided that earnings could be put to better use, by reinvesting back in the company, or to repurchase stock: the dividend payout ratio began sliding from over 60% to around 50%.
- The trend sped up over the past two decades: by the late 1980s, just 40% of S&P 500 profits turned into dividends; by 2004, it was 35%; today, it's a record-low 29%
Lower dividends are obviously not a welcome development. If companies aren't spending net income on dividends, what are they spending it on? The answer appears to be: acquisitions and share buybacks. And not always successfully. As the article notes, academic research shows that companies reducing the dividend payout subsequently usually have lower earnings.
However, there is some good news for the current S&P500:
- corporate America seems to have recovered from the recession
- real corporate profits are at an all-time high
- cash flow among S&P 500 companies is at a new record
- non-residential business investment is approachng to pre-recession levels
- average chief-executive compensation has increased
I don't know of any similar analysis of the FTSE100 but, inevitably, it tends to follow the US trends as well.
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.