Monthly Update: Global Dividends Fall in the Third Quarter, but Don’t Count Dividend Growth Out

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club Marc Lichtenfeld, Chief Income Strategist, The Oxford Club By Marc Lichtenfeld, Chief Income Strategist &
Kristin Orman, Research Analyst,

SafetyNet Pro Issues

For the second month in a row, SafetyNet Pro issued more upgrades than downgrades. Of the 82 ratings changes, 43 were positive and 39 were negative.

This may be the beginning of a broader trend. According to Standard and Poor’s, 189 companies raised their dividends in November. At the same time, 29 lowered them. Compared to November of last year, the number of increases grew 13.9% and the number of dividend decreases fell 17.1%.

This is great news for dividend investors… despite what you may be seeing about global dividend growth.

This year, the slowdown in global dividend growth has dominated headlines. But in reality, the situation isn’t as dire as it may seem.

The Henderson Global Dividend Index (HGDI) is a study of global dividend trends. It has been monitoring dividend activity since 2009.

Each quarter, it analyzes the dividends of the world’s 1,200 largest companies by market cap.

According to the study, North American special one-time dividend declarations in the third quarter fell 8.5%. But we’re not worried.

SafetyNet Pro does not include special dividends in its dividend safety rating. That’s because investors can’t count on them. SafetyNet Pro rates only the safety of regular dividends.

Excluding one-time payments, North American dividends actually grew 2.8% during the quarter. In comparison, North American dividends grew 9.9% during the 2015 third quarter. While this increase is the lowest on record for HGDI, it is still significant. The growth outpaces October’s 1.6% inflation rate by more than 1%.

One of the biggest risks facing retirees is inflation. As prices rise over time, purchasing power decreases.  Since dividend prices are rising faster than inflation, dividend income is protected.

Issue Highlights

  • In November, SafetyNet Pro upgraded 43 stocks and downgraded 39.
  • Global dividend declarations fell in the third quarter, but U.S. dividends – excluding one-time declarations – rose 2.8%.
  • Technology stocks accounted for the highest number of dividend payers.
  • Dividend-paying tech stocks beat the S&P 500 by 9% year to date.

Technology Companies Invest in Dividends… Investors Invest in Technology Stocks

Dividends are making tech stocks popular again with investors. Mature tech titans, like Microsoft (Nasdaq:  MSFT) and Apple (Nasdaq:  AAPL), are compensating investors for low growth with growing dividends.

In 2005, tech stocks made up 5.6% of the S&P 500’s dividends. Last year, the sector made up 15%.

On the HGDI, the largest industry represented is dividend-paying tech companies.

total-dividend-industry1

Index funds like First Trust Nasdaq Technology Dividend Index Fund (NYSE: TDIV) are making the most of the trend. Yield-hungry investors are eating up shares of dividend-paying tech stocks. The fund’s total return has beaten the S&P 500 by 9% so far this year.

Technology is becoming one of the hottest sectors in dividend investing.

dividend-investing-tech-sector

Industry Breakdown

As we already covered, SafetyNet Pro upgraded 43 stocks last month. It downgraded 39. The Industrials and Consumer Services sectors saw the most ratings changes.

To view the full list of ratings changes, including company names, click here.

safety-net-upgrades-december

An Internet of Things Upgrade

Wireless handset chip supplier Skyworks Solutions (Nasdaq: SWKS) released its fiscal 2016 earnings on November 3. Its Q4 results beat expectations.

For the quarter, Skyworks Solutions’ revenue was $835.4 million, $4.1 million above consensus. And EPS was $1.47, $0.04 above estimates.

The company is predicting sequential revenue growth of 7% to 9% in Q1 2017. Management expects the company to generate $1.58 in EPS.

Skyworks produces products for the smartphone, broadband, wearable and other Internet of Things markets. Its sales are booming with the growth of the Internet of Things. Some analysts predict this market could grow from $900 million in 2015 to $3.7 billion in 2020.

Skyworks Solutions’ free cash flow is growing, too.

After a slight dip in 2015 to $562.7 million, the company’s free cash flow rose to $906.4 million in 2016. And next year, Skyworks Solutions’ free cash flow is expected to rise to $1.08 billion.

Because of the strong cash flow growth, Skyworks Solutions has been upgraded from a “C” to a “B.”

This Company’s Free Cash Flow Is Losing Its Charge

Plantronics (NYSE: PLT) also reported earnings last month. For fiscal 2017 second quarter, the headset maker made $216.2 million in revenue. That was $4.71 million shy of expectations. The company’s Q2 EPS of $0.82 was $0.03 higher than estimates.

Estimates for the company have been falling since it revealed that sanctions from the ongoing lawsuit with competitor GN Netcom Inc. would cost Plantronics $5 million.

Free cash flow estimates for Plantronics’ year ending March 31, 2017, have fallen from $118 million to $107 million. That’s down 9% from the prior year.

Declining cash flow expectations caused Plantronics to drop from a “C” to a “D.”

Free Cash Flow Doubles and This Company’s Dividend Safety Does, Too

Semiconductor maker Applied Materials Inc. (Nasdaq: AMAT) announced its fiscal 2016 earnings results in November.

Its fourth quarter 2016 results were mixed. The company reported revenue of $3.3 billion. That’s $10 million below expectations. It also reported EPS of $0.66, $0.01 above expectations.

For its fiscal  2016, Applied Materials’ free cash flow was $2.21 billion. That’s up 133.1% from the $948 million it reported in 2015.

But it was the first quarter 2017 outlook that excited investors… and shares.

Next quarter, the company says it will make $3.2 billion to $3.34 billion in revenue. It also expects EPS of  $0.62 to $0.70. Those are well above Wall Street’s previous expectations of $3.12 billion and $0.58.

Since the report, shares have soared 8%. Its free cash flow estimates have too.

Wall Street 2017 free cash flow estimates have risen $701.1 million to $2.45 billion. That’s up 10.9% from 2016’s free cash flow.

Applied Materials has been upgraded from a “D” to a “B.”

Long Live Growing, Reliable Dividends

Retirees are living longer, so they need more income. And even though rates are heading higher, they cannot rely solely on fixed income. Equities, especially dividend stocks, will continue to be a critical part of retirees’ cash flows.

Although dividend growth is slowing, new industries – like tech – are emerging as dividend leaders. To increase your income, make sure you choose the dividend heroes and avoid the dividend zeros.

Keep an eye on SafetyNet Pro’s ratings to ensure you aren’t surprised by a dividend cut.

Good investing,

Marc and Kristin

This Month’s Rating Changes: