As of July 16, the dividend yield on the S&P 500 was a mere 1.34%. By no means is that attention-grabbing, but that number is poised to grow, and not just because equity prices are declining.
To this point in 2021, there’s been plenty of talk about dividend growth in both domestic and foreign markets. Second quarter data back that up as domestic dividends increased across large-, mid-, and small-cap stocks. However, there are indications that the payout growth picture could improve significantly well into next year.
“UBS predicted that S&P 500 dividends will grow by about 30%, or $150 billion in total, by the end of 2022, supported by a strong recovery in earnings,” reports Yun Li for CNBC. “Payouts are already on the rise with U.S. domestic common stock dividends increasing $12.9 billion during the second quarter, compared to a $42.5 billion drop a year ago in the height of the Covid crisis, according to data from S&P Dow Jones Indices.”
One reason for optimism when it comes to S&P 500 dividend growth this year is, with the approval of the Federal Reserve, banks are back in the payout growth game after sitting out 2020 due to the coronavirus pandemic. New payout growth from banks is a positive sign because the financial services sector accounts for almost 11.1% of the S&P 500.
Tech-driven models deployed by UBS “found that factors such as dividend yield, dividend growth, payout ratios and EPS revisions play a big role in companies’ ability to raise payout,” reports CNBC.
Also relevant to investors is the fact that the bank’s models are 75% accurate in predicting upward dividend revisions.
Investors looking to access specific sectors beyond financial services ripe for dividend growth may want to consider technology and healthcare. These groups are home to an array of cash-rich, quality companies. Healthcare and tech companies have shown abilities to boost payouts regardless of economic climate – something that was full display for most of the market in 2020.
Investors mulling another dividend redemption story may want to consider real estate. The sector encountered headwinds due to the COVID-19 pandemic, but it’s one of this year’s best-performing cyclical groups and funds from operations (FFO) across the sector appear solid.
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