Where have all the dividend payers gone?

If you read dividend blogs, you may think to yourself: “they all discuss the same stocks!” This perception may actually be true. Academic studies have shown that the number of dividend payers has declined for decades. Internationally, the proportion of dividend payers to publicly listed companies has decreased from 86.9% to 53.3% between 1985 and 2006.   Correspondingly, the dividends paid are increasingly concentrated in fewer and fewer firms. In fact, the top 25 companies in aggregate dividend paid contributed to over 50% of all dividends paid in multiple countries studied with the notable exception of U.S. and Japan where dividend payers are less concentrated.

It gets worse. While the percentage of  firms reporting positive earnings has increased internationally (94.7% for U.S. firms and 73.8% for non-U.S. firms in 2006), a sample size of 33 countries and 17,000 companies shows dividend payout ratios continue to decline to 33.8% on average. In other words, companies are more likely to make more money but less likely to pay such earnings to its shareholders.

There are obvious exceptions by industry. The proportion of dividend payers in the building materials-hardware, tobacco, food and electric tends to be very high (over 75% of companies in theses industries paid dividends) while metal mining, oil and gas exploration, health and business services industries are less likely to pay dividends (under 35%). The study also concludes if a company never paid dividends its chances of becoming a dividend payer are quite slim.

Why has this happened? There has not been a definitive answer and a single reason would be overly simplistic. Certainly, growing businesses in emerging countries are more likely to use earnings to expand rather than reward shareholders. There has also been, aided by declining capital gains tax rates, an increasing investor mentality to chasing the ten-bagger in lieu of boring  dividend paying stocks.  Finally, a boom in the number of companies listed publicly has also meant smaller and less profitable companies flooding the market, factors which are not conducive towards paying dividends.

Now, if you are a bear and believe the stock market will correct and then go sideways for years, it may mean a readjustment in the market to slower-growth and safer stocks which could reverse the trend of declining dividend payers. Demographic trends towards an older, and if one assumes less risk tolerant, investing public may also mean a return to cash flow, dividend investing. One can only hope since dividend paying stocks do outperform non-dividend paying stock in the long run.

No post tomorrow. Enjoy the weekend.