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Dividends… Even More Valuable (And Telling) During A Crisis

Updated: Sep 27, 2022

One of the surest ways companies can provide a return to shareholders is via dividends. In fact, the shareholder base of some companies relies on these dividends to meet their income needs and is really the driving factor in their stock ownership (i.e., utility companies). During a crisis, much like almost everything in life, this income stream takes on a greater significance, beyond the monetary value (or simply, the cash you receive on a timely basis).

During this crisis, driven by the Government completely shutting down portions of the economy, the first action of most corporations was to fortify their balance sheet to ensure they will be able to turn the lights back on when the time comes. For many companies, who do not have a warchest of cash, they either sought (or are seeking) debt via bond issuances or cheap money/bailouts from the Government.

Adding this dry powder is a sign that businesses do not know when they will reopen or more importantly, how long it will take to return to normal operations. Company executives are being conservative and want to ensure they have capital under even the worst case scenarios. Smart idea! If this is the case for much of Corporate America, what does it tell you when on the other side of the spectrum some companies are raising their dividends!?!?!

That’s right, even during these most dire times, Costco just raised it’s dividend by 8%. Johnson & Johnson raised theirs by 6%. Of course, receiving these dividend payments is great, but more significant, these companies are telling shareholders that even during this unknown period we are so confident in our business (and balance sheet) we not only are paying you a dividend, but we are going to increase it!

This act by management is far more valuable than the actual cash they are paying out. You see, as positive as this action is viewed, it is equally negative when a company has to suspend a dividend. Paying a dividend, especially during these times, is management telling investors that we are confident in the long-term prospects of their company. In these uncertain times (remember, uncertainty is the stock market’s worst enemy), this provides some certainty… at least for particular companies.

To drive this point home, this chart to the right is the performance of the S&P 500

Dividend Aristocrat Index vs. the S&P 500 Index. A company is considered an aristocrat when it consistently increases its dividend for at least 25 years. Needless to say, these are experienced companies with a high level of confidence in their ability to perform and thus pay their dividend. The chart demonstrates how well this index performs during up and down markets. The Dividend Aristocrats outperforming the S&P 500 in 12 of 20 years, is not solely a result of their dividend prowess. This tells us these are high quality companies that are paying these consistent dividends!

While dividends play an importantly role in investor’s income plans, the act of paying a dividend may be even more significant when finding great companies to invest in… especially during a crisis!

Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities. The chart above is from Visual Capital.


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