Will Stock Prices Follow Dividends

The short answer is yes, eventually. And right now the dividend picture is improving:

A widespread recovery is under way among companies that throw off cash to shareholders.

Since January, 136 companies in the Standard & Poor’s 500-stock index have either increased their payouts or initiated new dividends, collectively bolstering payments by $11 billion this year. The list includes companies in a broad array of industries, like Starbucks, which initiated its first dividend; Marriott International, which reinstated its cash dividend; and Travelers, which raised its dividend.

At the same time, only two companies in the S.& P. 500 have decreased or suspended dividends since January.

The recent trend is a big improvement from 2009, when there were 157 dividend increases and initiations versus 78 decreases or suspensions. Over all, those actions collectively cut payments to shareholders by $37 billion, a record.

What does this typically mean for stocks?

Brian G. Belski, chief investment strategist at Oppenheimer, added that after periods when dividend payments hit a trough — as they did at the end of 2009 — the broad market has historically rallied. Since 1970, the S.& P. 500 has returned an average 9.7 percent annually during periods of dividend recoveries.

What’s more, those rallies tend to last several years. Over the last 40 years, in the first year after dividend recoveries, stocks have returned 10.6 percent, on average, Mr. Belski said. The second years of such rallies have had smaller gains, of 3.4 percent on average, followed by gains of 10.8 percent in the third year and 20.1 percent in the fourth.

I am certainly finding plenty of cheap stocks in this market, many of them that pay dividends. One of the good things about good dividend stocks is that even if they don’t rally the dividend provides some cash return. With money market and other safe alternatives offering basically zero yields, a solid dividend payer is pretty attractive.

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