Recent Dividend Growth

From 1950 to 2000 the S&P500 (nominal) dividend amount grew steadily at 5% per year. Now it has jumped to 11% per year. What is going on? What should we expect, looking forward?

Analysis

I looked at Professor Robert Shiller’s S&P500 data. I thinned it to January values of each year. I plotted the (nominal, not adjusted for inflation) dividend amount versus year. I constructed scatter charts for 1987 to 2007, 1997 to 2007 and 2002 to 2007. I had Excel calculate linear regression equations. I calculated the annualized dividend growth rates: (1+rate)^(number of years) = (final dividend amount)/(initial dividend amount).

[I also had Excel calculate exponential equations, but the curves were almost identical.]

Here are the results:

1987 to 2007: dividend growth rate = 4.6% per year.
1997 to 2007: dividend growth rate = 5.9% per year.
2002 to 2007: dividend growth rate = 11.2% per year.

That is quite a jump.

Looking at the 1987 to 2007 graph, the dividend growth rate was reasonably stable until 2000. There was a short pause (actually, a slight decline) followed by a sharp uptrend.

To gain insight, I calculated and graphed the (single year) payout ratio versus year.

The graph shows a distinctly downward trend from 58% to 36% over the twenty year period. The actual payout ratio fluctuated considerably, consistent with unsmoothed (single year) earnings fluctuations. The payouts from 2004 through 2007 decreased from 35.3% to 30.6% and were below trend.

With the economy approaching recession, we can expect (single year) earnings to fall, causing the (single year) payout ratio to climb. Still, the previous peaks were 76.3% in 1992 and 63.7% in 2002, declining at almost the identical rate as the trend line on the graph.

Corporations are in a good position to maintain their dividends. There should be very few dividend cuts assuming that earnings have been reported accurately. [Notably, there are criminal investigations related to mortgage lending practices.]

The period most likely to represent the future is 1997 to 2007. It shows dividend growth above trend, below trend and above trend, in that order. I would expect the next oscillation below trend soon because of earnings shortfalls.

Estimates

Based on the 1997 to 2007 trend, I project a 6% per year growth rate in the (nominal) S&P500 dividend amount.

Based on today’s low payout ratio, there could be 5 to 10 years of even faster dividend growth. Based on 2002 to 2007 data, I place the upper limit at 11% per year.

Have fun.

John Walter Russell
July 13, 2007