As the raging bull market died and turned into a major bear market, investors were spooked. The peak of the selling waves took the Dow Jones industrials down almost 40% and the S&P 500 down 35% from their highs. While stocks have come roaring back, there is still an economic recession, millions of people have become unemployed, businesses are strapped for cash and raising liquidity, and many companies are slashing or suspending their dividend payments to their shareholders to conserve cash.
It turns out that, even in the toughest times, some companies still manage to generate dividend growth and prove that they have safe dividends. Raising dividends during a recession is always an impressive way to show confidence in long-term earnings. Moreover, if a company has seen annual dividend increases for 30 years, it has managed to navigate through four recessions now, implying that the company has a strong balance sheet and strong free cash flow.
One fear from the instant recession that came up in February through March was that even the safest dividends were suddenly considered at risk. Investors in the safest of the stable and defensive stocks were hearing earnings warnings and withdrawn guidance for 2020. The market was spooked into thinking that the payout ratios in top utilities, telecom giants and consumer products companies were suddenly in a climate in which their earnings and dividends might be at risk and not as safe as they were thought to be.
Many companies already have announced that they would lower or suspend their dividend payments because of the sudden recession. Many more companies also will have to lower or suspend those payments in the coming weeks. More companies have lowered, suspended or canceled their dividends so far in 2020 than in the past 10 years combined.
It appears with the stock market recovery that the major pandemic scare under the COVID-19 recession appears to have gone too far when it comes to the highest quality companies. Again, some companies still are managing to raise their dividends. Investors need to keep in mind that dividend-paying stocks may see half of their total returns over time come from quality dividend hikes.
The S&P 500 Dividend Aristocrats is a list of companies that have managed to raise their dividends for 25 consecutive years or more. While not all companies raising dividends are counted as “aristocrats,” it is impressive for a company to be able to raise its payouts when unemployment is rising, consumer spending is shifting downward and away from traditional retail, and when much lower business spending and hiring have all culminated into an instant recession.
24/7 Wall St. has tracked 15 companies that have announced dividend hikes in April. While the stock market peak was in February, many companies and individuals were not forced into operating as though they were in a deep recession until after the first or second week of March. Any company raising its dividend after that time already had full understanding that unemployment might reach 20% and that gross domestic product would face a major contraction.
Proof That Life Does Require Water
American Water Works Co. Inc. (NYSE: AWK) announced a 10% payout hike on April 29 to $0.55 per common share. Its stock was weak a month ago on concerns that nonpaying customers would not be cut off as the recession fears grew. Almost all utilities have seen big recoveries in their stock prices, and the top water utility has recovered as well.
American Water Works now has more than a 1.7% dividend yield for new investors, based on its current share price. It has committed to higher dividends and higher earnings, along with a targeted payout ratio of 50% to 60% of net income.
IBM’s 5.2% Yield for Big Blue Shareholders
International Business Machines Corp. (NYSE: IBM) announced a dividend hike of one cent per share on April 28, 2020. While that may sound like an unimpressive hike, the yield is close to 5.2%, and this marked the 25th straight year that IBM has hiked its dividend and marked more than 100 years of continuous dividend payments.