Heading into the uncertainty of 2016, income investors will still likely be able to find compelling dividend stocks as companies continue to grow their dividend payouts over last year.
Of the total $2.2 trillion S&P 500 companies are expected to spend in 2016, 46%, or $1 trillion, is expected to be returned to shareholders in the form of buybacks and dividends, according to a research note by Chief U.S. Equity Strategist at Goldman Sachs David Kostin. The numbers reflect a year-over-year increase in S&P 500 dividends per share of 7%, slightly lower than the 9% grown in 2015 relative to 2014.
“We expect high cash return strategies to outperform given modest GDP growth, low rates and slim equity returns,” Kostin said.
For the next several years, Kostin also expects the dividend growth rate to parallel his estimate of earnings per share growth. By individual sector, Kostin pointed to financials, where he expects 10% dividend growth in 2016, the highest of any sector, and energy, where dividends may struggle.
Dividends have played an important role in total equity returns no matter the time horizon, a Brandes Investment Partners study examining 89 years of market returns showed. The income component of returns on U.S. equities was significant for terms as short as five years and “dominant” for periods of 20 years or higher.
“We believe this research illustrates that the industry acceptance of five years as a long-term investment horizon underestimates the potential of reinvesting and compounding income,” Brandes Investment Partners said. “By reinvesting the income contribution of investment returns, investors can leverage the power of compound interest.”
In recent years, dividend stocks may have disappointed some income investors. The Russell 2000 Growth index, for instance, produced a five-year total return of 13.4%, exceeding the Russell 2000 Value index, whose value stocks are likely to pay a dividend, return of 10.6%. Value has historically beaten growth over the long term, however, and some experts expect the style to return to outperformance in the upcoming year.
A new GuruFocus tool can search out stocks currently paying the highest dividend payouts in their history. Setting the screen for stocks with dividend yield of at least 3.1%, with a payout ratio less than 0.5%, that have been increasing their dividends for a minimum of 10 years and are paying at least 10% below their historical high dividend yield generates five stocks. By nearness to their historical high dividend yield, they are: IBM Corp. (IBM, Financial), Occidental Petroleum Corp. (OXY, Financial), Murphy Oil Corp. (MUR, Financial) and Wal-Mart Stores Inc. (WMT, Financial).
IBM, the $134 billion market cap information technology giant, saw its shares decline 14% year to date. The company also reported weaker financial results in the third quarter as it seeks to transform its business, with revenue from continuing operations down 14% without adjusting for currency or a divested business, at $19.3 billion. Net income from continuing operations fell 14% year over year to $3.0 billion.
IBM returned $2.8 billion to shareholders in the third quarter through $1.3 billion in dividends and $1.5 billion in share repurchases, with a quarterly dividend amount of $1.30 per share. Its trailing dividend yield stands at 3.6%, which falls within 1.6% of its historical high dividend yield. IBM’s payout ratio is 0.33.
Occidental Petroleum Corp. (OXY, Financial)
Occidental Petroleum is a $52.8 billion market company operating oil and gas, midstream and marketing, and chemicals businesses. The company’s shares traded down almost 16% year to date.
For the third quarter, Occidental Petroleum reported $24 million in net income, or a loss per diluted share of $3.42, compared to net income of $560 million, or a loss per diluted share of $4.41 in the third quarter last year. Its revenue totaled $2.05 billion, down from $2.996 billion the same period last year, as oil and natural gas prices continued to decline.
Occidental continued to pay its $0.75 dividend per common share, which reflects an increase from $0.72 per share last year. The company offers a dividend yield of 4.4%, falling within 3.3% of its historical high yield, with a payout ratio of 0.39.
Murphy Oil Corp. (MUR, Financial)
Murphy Oil Corp. is an international crude oil and natural gas company with a $3.97 billion market cap. Its share price year to date has descended 55.7%.
Murphy Oil reported a net loss of $1.6 billion, or $9.26 per diluted share, for the third quarter, driven by oil price declines, compared to net income of $245.7 million, or $1.37 per diluted share in the third quarter last year. Revenue also fell to $714.95 million from $1.43 billion for the same periods.
The company also continued to pay its $0.35 per share dividend, unchanged from a year ago. The stock’s dividend yield has reached 6.2%, within 3.3% of its historical high. Murphy Oil has a payout ratio of 0.4.
Wal-Mart Stores Inc. (WMT, Financial)
Wal-Mart Stores Inc., the massive retailer with a $194.8 billion market cap, saw its shares tumble 28% year to date.
The company recorded a 1.3% decline in third quarter revenue over the previous year quarter. Consolidated net income also slipped to $10.3 billion from $11.9 billion for the same periods.
Wal-Mart paid $1.6 billion in dividends for the quarter and repurchased roughly 6 million shares at a cost of $437 million. Its most recent quarterly dividend in December was $0.49 per share. Its dividend yield, at 3.2%, falls 6.94% below its historical high dividend yield, and it has a payout ratio of 0.42.
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