Stock Buyback Rate Continues To Increase

S&P Dow Jones Indices recently reported stock buyback results for the fourth quarter of 2020 noting a 28.2% increase in the quarter versus the third quarter increase of 14.8%. This increase in buyback activity for S&P 500 companies follows a steep contraction in Q2 2020, i.e., $88.7 billion versus $198.72 billion in Q1 2020. Aggregate dividends paid in Q4 2020 increased to $118.84 billion versus $115.54 billion in the third quarter last year. Buybacks totaled $130.5 billion versus Q3 buybacks of $101.8 billion. This level of buybacks pushes the quarterly back amount above the dividends paid in the quarter as seen with the red and purple lines in the below chart.

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So Far, A Better Year For The Dogs Of The Dow

In 2020 the Dogs of the Dow strategy significantly lagged the return of the broader S&P 500 Index. For the 2020 calendar year the Dow Dogs returned a minus 8% versus the S&P 500 Index return of 18.4%. Several factors led to the Dow Dog underperformance. First, the 2020 Dow Dogs held two energy stocks out of the total ten stock portfolio. Exxon Mobil (XOM) was down 36% and Chevron (CVX) was down 29% last year. In the technology space, the two Dogs were IBM and Cisco (CSCO), down 1.2% and down 3.5%, respectively. For 2021 though, the Dow Dogs have jumped out to a strong start up 12.0% versus the SPDR Dow Jones Industrial Average (DIA) up 8.9% and the SPDR S&P 500 Index (SPY) up 7.5% as seen in the below table.

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Dividend Aristocrat Changes For 2021

S&P Dow Jones Indices announced the results of its annual rebalancing of the S&P 500 Dividend Index. Three companies are being added in this rebalancing and three are being removed, leaving the number of Dividend Aristocrats at 65. The changes go into effect prior to the market open on February 1, 2021. As noted by S&P, "S&P 500^® Dividend Aristocrats^® measure the performance of S&P 500^® companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company." In addition to the dividend increase requirement, other factors S&P Dow Jones Indices includes in the methodology to select the dividend aristocrats are:

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Stock Buybacks Increase As Reported Earnings Jump

S&P Dow Jones Indices' recent report on buyback activity for the third quarter shows buyback activity increasing to $101.79 billion from $88.66 billion in the second quarter. With the economy mostly reopening, at least through Q3 2020, companies reported an improvement in 'as reported earnings,' increasing to $273.2 billion versus $98.5 billion for the first quarter. As the red line in the below chart shows though, buybacks remain far below the fourth quarter 2018 peak of $222.98 billion.

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Dogs Of The Dow Are Dogs This Year

With less than thirty trading days left in the year, the Dogs of the Dow have a great deal of ground to make up just to be competitive with the return for the Dow Jones Industrial Average Index and the S&P 500 Index. Not one of the Dow Dogs has a positive return on a price only basis this year. The Dow Dogs are down 15.0% on a price only basis and down 11.2% on a total return basis. The Dow Jones Industrial Average Index also lags the S&P 500 Index but has generated a positive return to date. On a price only basis the SPDR Dow Jones Industrial Average ETF (DIA) is up 2.6% and up 4.7% with dividends. The SPDR S&P 500 Index ETF (SPY) is up 10.4%, price only and up 12.0% with dividends.

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Dividend Paying Strategies Have Lagged This Year, Now An Opportunity?

One unique aspect of the difficult economic environment that followed the virus mandated shutdown, was the underperformance of high quality dividend paying stocks. From the S&P 500 Index peak in mid February to the bottom on March 23, 2020, one of the weakest performing asset classes was dividend paying stocks. As the below chart shows, the iShares Select Dividend ETF (DVY), the SPDR Dividend ETF (SDY) and the Proshares S&P 500 Dividend Aristocrats ETF (NOBL) were some of the weakest performing large cap equity categories. The second chart below shows the dividend paying categories have kept pace with the broader market since bottom in March.

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Significance of an Index Dividend Yield Greater Than 10-Year Treasury Bond Yield

It probably goes without saying but bond market interest rates have been driven down to unforeseen levels, near zero, causing investors to search for yield in other places. The actions of Central Banks around the world are contributing to this low or no interest rate environment. As the bottom panel in the below chart shows, since the financial crisis in 2008/2009, the spread between the dividend yield on the S&P 500 Index and the 10-year Treasury yield has oscillated between a positive and negative level. Currently, the S&P 500 Index yield is greater than the 10-year U.S. Treasury yield with a spread of 88 basis points.

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So Far Not A Year For The Dogs Of The Dow

This year has not been a good one for the Dogs of the Dow strategy. A number of reasons can be cited, like energy sector weakness and both Chevron (CVX) and Exxon Mobil (XOM) included in the strategy this year or Cisco System (CSCO) and IBM a part of the Dow Dog portfolio and not Apple (AAPL). In a year where the FAANG + Microsoft (MSFT) portfolio is so dominant from a return perspective, it is clear from hindsight why the Dow Dogs are lagging.

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S&P 500 Dividend Aristocrats Lag In This Down Market

A favorable characteristic of the S&P 500 Dividend Aristocrats is this basket of stocks generally holds up better in broader market pullbacks as seen in the below table. Where the entire row is highlighted, it represents a significant market pullback and the Aristocrats outperformed the S&P 500 Index by double digits. The S&P 500 Aristocrats are companies in the S&P 500 Index that have increased their dividend each year for at least 25 consecutive years. The companies are then equally weighted in the Dividend Aristocrats Index. I have written about the Aristocrats several times in the past with a more comprehensive article at this link.

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New Dividend Aristocrats For 2020

Last week S&P Dow Jones Indices announced the annual rebalancing of the Dividend Aristocrats. In the rebalancing results, no companies are being removed, but S&P announced seven new additions to the Aristocrats for 2020. This brings the number of Aristocrats to 64 companies. The changes go into effect prior to the market open on February 3, 2020. As noted by S&P, "S&P 500^® Dividend Aristocrats^® measure the performance of S&P 500^® companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company."

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Dow Dogs 2019 Return Unable To Keep Pace With Broader Market

First of all I want to wish everyone a Healthy and Prosperous New Year as a new decade unfolds. The  just completed decade certainly ended with a bang with the S&P 500 Index (SP500) up 31.49% and the Dow Jones Industrial Average Index (DJIA) up 25.34%. One strategy that significantly underperformed both the DJIA and the SP500 was the Dogs of the Dow investment strategy. Readers may recall from earlier posts the Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Average Index after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds that portfolio for the entire next year. The popularity of the strategy is its singular focus on dividend yield.

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Buybacks Resume Growth In The Third Quarter

Buybacks for companies in the S&P 500 Index turned higher in the third quarter to $175.89 billion after declining from a peak of $222.98 billion in Q4 2018 as represented by the red line in the below chart. With a resumption of higher buybacks, the total of dividend and buybacks increased in Q3 to $299.01 billion versus $284.14 billion in Q2 2019. Quarterly totals for dividend payments consistently maintained growth on a year over year basis, unlike the decline in buybacks.

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Stocks Responding To Improved Earnings Expectations

Earnings growth expectations for S&P 500 companies continue to improve with the 12-month forward earnings growth estimate equaling 9.18%. This improving trend has been in place since February and is one tailwind supporting higher stock prices so far this year.

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Buybacks Down In First Quarter 2019, But Remain Near A High

Late last month S&P Dow Jones Indices reported preliminary dividend and buyback results for the S&P 500 Index for first quarter of 2019. On a quarter over quarter basis dividends declined by $2.48 billion. This sequential decline in the first quarter versus the fourth quarter is not an uncommon occurrence. On a YoY basis dividends were up 7.46% and this was down from the fourth quarter YoY growth rate of 9.46%. Buybacks declined by $17.17 billion on a QoQ basis. As reported operating earnings were up significantly on a QoQ basis, +$48.32 billion or 19.9%, but only up 3.54% on a YoY basis.

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Dogs Of The Dow Update: As Of June 21, 2019

With the first half of 2019 nearing an end, the Dogs of the Dow strategy is keeping pace with the Dow Jones Industrial Average Index. However, the Dow Dogs for 2019 trail the return of the broader S&P 500 Index. The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Average Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds that portfolio for the entire next year. The popularity of the strategy is its singular focus on dividend yield.

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Dogs Of The Dow Lag Broader Market

With nearly a third of the year behind investors, following is an update on the performance of the Dogs of the Dow strategy. The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Average Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds that portfolio for the entire next year. The popularity of the strategy is its singular focus on dividend yield.

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Dogs Of The Dow A Winning Strategy In 2018

With the 2018 investing year now closed, one strategy that turned out to be a winning one was the Dogs of the Dow strategy. The Dogs of the Dow strategy is one where investors select the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Average Index (DJIA) after the close of business on the last trading day of the year. Once the ten stocks are determined, an investor invests an equal dollar amount in each of the ten stocks and holds them for the entire next year. The popularity of the strategy is its singular focus on dividend yield.

I have written about this from time to time and early in 2018 the Dow Dogs were underperforming both the S&P 500 Index and the Dow Jones Industrial Average Index. This was on top of the fact the Dow Dogs underperformed the market in 2017. Through the first half of 2018 the Dow Dogs continued their lagging ways; however, a more volatile market in the second half of last year benefited the strategy and the Dogs of the Dow ended up generating a slight positive total return of .02% for 2018. This compares to a loss of 3.74% for the SPDR Dow Jones Industrial Average ETF (DIA) and a loss of 4.56% for the SPDR S&P 500 Index ETF (SPY) as displayed in the below table.

Data File (xls)

Both Merck (MRK) and Pfizer (PFE) were the top performing Dow Dogs and the top performing stocks in the broader Dow Jones Industrial Average Index for 2018 as well.

As the new year begins, one new member joins the Dogs of the Dow for 2019. Entering the Dow Dogs in the coming year is JP Morgan (JPM) with a dividend yield of 3.28%. Dropping out of the Dogs is General Electric (GE) not only because of its lower yield, but GE was removed from the Dow Jones Index last year.

Long MRK, VZ, JPM

Dividend And Stock Buyback Growth Potentially Accelerate In 2018

Near the end of last month S&P Dow Jones Indices reported preliminary dividend and buyback activity for the S&P 500 Index for the fourth quarter of last year. For the quarter the dollar amount of dividends paid increased 5.4% versus the same quarter in the prior year. Additionally, for the quarter, dividends combined with buybacks increased 3.1% year over year. It is not uncommon for the combined dividends with buybacks to exceed as reported earnings in the quarter and that was the case for Q4 2017 as seen in the below chart.

Source: S&P Dow Jones Indices

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Bond Yield To Stock Yield Spread Sufficiently Wide To Challenge Stock Returns

A little over a year ago I noted the yield on the 10-year Treasury surpassed the dividend yield of the S&P 500 Index. With rising bond yields, there becomes a point when the bond yield is sufficiently high relative to the yield on stocks that bonds can challenge stock returns. In that earlier article I referenced a research article written by CFRA Research's Sam Stovall and titled, Rising Prices, Shrinking Yields. In the research article it was noted prospective stock returns became most challenged when the yield on the 10-year U.S. Treasury exceeded the dividend yield of the S&P 500 Index by at least one full percentage point, i.e. 100 basis points. The forward return at varying spreads is detailed below.

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Rising Interest Rates A Headwind For Dividend Paying Stocks

Since July 2016 the yield on the 10-year US Treasury Note has increased from 1.32% to nearly 3% today. This doubling of longer term interest rates is creating a headwind for dividend paying stocks resulting in their underperformance versus their non-dividend paying counterparts as well as the broader S&P 500 Index.

The maroon line in the below chart represents the total return for the S&P 500 Index divided by the total return for the iShares Select Dividend ETF (DVY), When the maroon line is moving higher, the S&P 500 Index is outperforming the iShares Dividend ETF. Clearly the broader S&P 500 Index has been outperforming the dividend payers since July 2016. The blue line on the chart represents the yield on the 10-year U.S. Treasury Note and it is not a coincidence that the dividend payers are underperforming just as the 10-year Treasury yield began to rise in July of 2016.

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