According to an article penned by Michael Aneiro at Barron’s, the S&P 500 added 13 new dividend players to its roster so far this year. That brings the number of companies in the index paying a dividend to 402, matching a level not seen since 1999.
Imagine that: 98 companies in the index don’t pay a dividend. We’ll get to that in a moment.
First, some interesting notes on the vast majority that do pay:
- Year-to-date dividends are up 14.7% compared to last year, according to Howard Silverblatt, senior analyst at S&P Dow Jones Indices.
- August’s payment number will increase by over 30%, thanks to Apple‘s (NASDAQ:AAPL) new payout.
- AES (NYSE:AES), NRG Energy (NYSE:NRG), Phillips 66 (NYSE:PSX) and Dell (NASDAQ:DELL) are the latest to incorporate dividends.
- 22 S&P companies have increased dividend rates this year, and 70% of the index is expected to pay out more in 2012 than 2011.
What’s going on? It’s really pretty simple, at least in one man’s (mine) opinion: Despite the gloom and doom of an economic slowdown, which is very real, many companies are making a lot of money and stockpiling cash. The problem is, like individual investors with some money, these companies aren’t sure what to do with that dough.
Combine the supply (money) with demand (from investors just dying for any kind of yield or income above anemic-to-negative CD, Treasury or money market funds), and you have a recipe for flush companies funneling some of their cash back to needy shareholders.
It all seems simple. Still, not all of the 98 non-payers can jump on the dividend bandwagon. Many have no chance of instituting a payout due to losses in the business. Some just don’t have enough cash, either on the balance sheet or through cash flow, to come up with the extra money. In fact, in researching this topic, I found it was a little eye-opening how many of this group really couldn’t afford to shell out excess cash.
And, of course, there’s Berkshire Hathaway (NYSE:BRK.B), which will NEVER pay a dividend despite 1) sitting on an enormous amount of cash and 2) making billions investing in companies that ALWAYS pay a dividend. But that’s for another day.
Still, some of the holdouts sure look like they could join with their S&P brethren in becoming dividend payers — and perhaps they should. Let’s take a look at three solid candidates for instituting a dividend:
EMC (NYSE:EMC), the Massachusetts representative in InvestorPlace’s Real America Index, isn’t your typical high-tech company just starting out and trying to conserve cash for growth. It has been around since 1979, went public in 1986 and has built a solid foundation. It also has just over $6 billion in cash, and another $6.4 billion in operating cash flow. That’s plenty of money to cover its well under $1 billion in capital spending. It also has recorded steady earnings and revenue growth over the last five-year period.
Discount retailing is all the rage, witness the appreciation in stock prices for Dollar Tree (NASDAQ:DLTR), Family Dollar (NYSE:FDO) and Dollar General (NYSE:DG), all well above the S&P 500’s one-year return. FDO pays a dividend, so why not DLTR? You would think with 87% of the stock owned by institutional investors, a dividend is a no-brainer, but not yet. OK, Dollar Tree might be a tad tight, as cash and cash flow levels top out at just about $1 billion, and DLTR likes to add stores. But this is a sound business with a long history, and a token gesture seems appropriate.
I hate it when high-flying tech companies hide behind the “we need to continue to reinvest in the business” argument for hoarding cash. Reinvesting includes acquisitions, of course, and that’s a primary reason to stockpile cash. And Google (NASDAQ:GOOG) is relentlessly innovating, so I will give it that. Between capital expenditures and “investments,” it spent over $16 billion in 2011.
But Google is making money hand over fist. It will soon split its stock, it’s sitting on nearly $42 billion in cash and is generating about $8 billion in cash flow after those capital expenditures. The stock trades for a very conservative 19x earnings — vs. Amazon’s (NASDAQ:AMZN) absurd 242x. So, it just seems to me a small token of quarterly appreciation couldn’t hurt at all, especially since Google shares are lagging the S&P 500 over the last year.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long AAPL.