Market MovesMarch 15, 2024

Long-Ignored Dividends Will Rise, Says Jefferies

Stock buybacks are expected to shrink, leaving room for more payouts, the firm believes.

Reported by Larry Light

Dividend-paying stocks have long been the dogs of the investing world. Associated with stodginess, they were extremely un-cool among investors obsessed with hot tech growth stocks and traditionally have been paid by older companies.

Expect dividends’ lot to improve, per Jefferies Financial Group. “Most sectors except for energy and autos are expected to grow dividends, led by media and [semiconductors],” Desh Peramunetilleke, Jefferies’ head of microstrategy, wrote in a research note.

Helping dividend payers is that stock buybacks, long a favorite of corporate America, are ebbing in popularity. For the 12 months ending September 2023, buybacks totaled $787 billion, down from $982 billion, or 20%, for the comparable prior period, S&P Dow Jones Indices reported.

Dividends, on the other hand, were up 5% to $580 billion during that stretch, S&P stated. The lower relative cost to companies of dividends is starting to dawn on investors, the backers argue. In 2024, dividend payout totals should climb 6.2%, Jefferies indicated.

One big reason that buybacks are losing ground is that they are often paid using borrowed money, and the cost of capital has risen lately. “The higher cost of debt is translating to lower buybacks,” Peramunetilleke wrote.

Another factor is that Washington in 2023 imposed a 1% tax on buyback transactions, and President Joe Biden proposed, in his fiscal year 2025 budget and recent State of the Union address, to hike that to 4%. No such levy is envisioned for dividends.

The reduced amount of buybacks frees up cash for dividend payments, Peramunetilleke reasoned. Lower inflation, moderating economic growth and dropping prices for commodities (most recently a destination for investment dollars) all will boost the attractiveness of dividends, both for the companies issuing them and the investors buying their shares, in his view.

Dividends have long languished: Their yield in the S&P 500 is a mere 1.47%, down from 1.84% the year before, as the index’s rise has outpaced the payout rate. By contrast, the benchmark 10-year Treasury bond yields 4.3%. Tech is where the price appreciation has been, and the sector is very skimpy with payouts. The yield for the Invesco QQQ Trust, an exchange-traded fund that covers the top tech stocks, is only 0.58%.

Even stocks yielding above 5% have in the past lacked the oomph to surpass buybacks. Since the end of 2008, the year of the financial crisis when dividend-heavy stocks took a disproportionate pasting, through 2023, these high-yielding stocks advanced 450% in total returns (price plus dividends), FactSet data indicates. The S&P Composite 1500, representing the broad stock market, returned 640%. And companies that do not pay dividends spiraled 1,200%.

Still, Meta Platforms Inc, one of the Magnificent Seven tech-stock megaliths, just instituted a dividend. True, the Facebook parent’s yield is a puny 0.41%. But it is not alone. Three other Mag Seven stocks have small dividends, yet dividends nonetheless: Microsoft Corp., Apple Inc. and Nvidia Corp.

Jefferies compiled a 10-stock list of good dividend payers, using forward expected payouts. These picks are highly profitable, underscoring their ability to maintain their dividends, and sport market caps above $5 billion. One of them even is a tech outfit, Broadcom Inc., yielding 1.6%. The others are more typical payers, such as consumer goods companies (Procter & Gamble Co. at 2.5%) and energy (Enterprise Products Partners LP at 7.6%)