GM General Motors Company

By Paul Vigna 

General Motors Co. suspended its dividend earlier this week, part of a raft of moves to keep the company afloat in the midst of the coronavirus pandemic. It is far from alone.

More companies have suspended or canceled their dividends so far this year than in the previous 10 years combined, with companies scrambling to preserve cash as the coronavirus pandemic saps revenue.

Through Tuesday, 83 U.S. companies and public investment funds, like real-estate investment trusts, have suspended or canceled their dividends, the highest number in data going back to 2001, according to S&P Global Market Intelligence. In the previous 10 years, 55 companies eliminated their dividends -- payouts that companies make to shareholders as a reward for standing by them.

"You would be hard-pressed to find a better time to cut dividends and get forgiveness from investors," said David Lafferty, chief market strategist at Natixis Investment Managers. "We're going to see a massive pullback" among companies attempting to hoard capital or bowing to political pressure.

GM and rival Ford Motor Co., which also suspended its dividend last month, are attempting to ride out a multiweek shutdown of the auto industry that has led to a collapse in vehicle demand. Other companies such as Delta Air Lines Inc., Carnival Corp., Boeing Co. and Macy's Inc. paused their dividends when global travel stalled and retailers temporarily closed their doors to slow the spread of the virus.

An additional 142 companies have reduced their payouts to shareholders in 2020, on pace for the worst year since 2009 when there were 316 such cuts. All the dividend actions so far add up to savings of about $23 billion, according to S&P Dow Jones Indices.

Overall, dividend payouts will fall about 10% this year, Bank of America predicts, with the biggest cuts coming from companies in the energy and consumer discretionary sectors. Last year set a record for dividend payouts at $491 billion.

In the short term, investors haven't punished companies for suspending their dividends. Shares of GM, Boeing, Carnival and Delta all rose in the trading session after they announced the moves -- a sign that investors are ignoring the usual dour implications of such cuts at a time when companies across industries need to conserve cash.

"If the dividend suspension makes sense, I'd be OK with it," said Don Kilbride, senior managing director at Wellington Management and portfolio manager of the Vanguard Dividend Growth Fund. "A period of weaker dividend growth given the environment should not bother you."

The recent stock-market rout has made dividends an even more crucial source of income for investors. With the market in turmoil and central banks pushing down rates on government debt, the yields on dividend-paying stocks and funds have become more attractive. The S&P 500 is down 11.4% this year.

The collapse in prices has translated into a surge in yields -- the ratio of the dividend payout divided by stock price. The S&P 500's dividend yield has risen to 2.06% from 1.73% at the start of the year. It climbed as high as 2.56% on March 23 when stocks hit their recent lows, marking the highest level since August 2009.

In comparison, the yield on the benchmark 10-year U.S. Treasury note is 0.61%. The spread between the two yields on March 23 was the widest on record in data going back to 1999, according to Dow Jones Market Data.

"Dividends versus fixed alternatives look more attractive," Mr. Lafferty said. But that on its own doesn't offset the risk that a company will cut or suspend its payout, he cautioned.

The surge in yields has been even more dramatic for some beaten-down stocks. Exxon Mobil Corp. shares, for instance, have fallen 36% year-to-date, pushing the yield up to 7.7% from 4.99% at the start of the year. Chevron Corp. is down 25% this year; that has pushed its yield up to 5.7% from 3.95%.

Rising yields are good for investors, but the subtext is critical. If the yield is rising because of a falling stock price or problems at the company, it may not be sustainable. Both Exxon and Chevron have outlined plans to slow other spending during the pandemic, partly to preserve their ability to maintain their dividends.

Almost as important as the income stream itself, dividends are a way for companies to send a signal to investors, which is a big reason why they are loath to cut them, said Simeon Hyman, the chief strategist at asset manager ProShares, which sells dozens of exchange-traded funds.

"If you increase your dividend, you are pounding the table that you have confidence," he said, mentioning recent increases from both Johnson & Johnson and Procter & Gamble Co. "If you're cutting, you are capitulating. You are saying times are going to be bad for a little while."

All four companies are known as dividend aristocrats, firms that have increased their shareholder payouts every year for at least 25 years. S&P has an index that tracks 64 companies in its benchmark index that meet the criteria.

There are a number of ETFs that, in turn, track the dividend aristocrats. Some companies are hesitant to cut their payouts because they don't want to be removed from such funds.

One of the most high-profile is the ProShares S&P 500 Dividend Aristocrats ETF. The ETF is down 15% on the year, underperforming the S&P 500. But the drop has nudged up the fund's yield to 2.4% from 2.3% at the end of 2019.

"Some of these funds, in fact, could shield investors from a collapse in dividends," Mr. Hyman said.

That isn't only because investors are buying long-term, quality companies, he said, they are also shielded from the direct impact of dividend cuts.

If a dividend aristocrat cuts its payout, it is dropped from S&P's index and subsequently the ETFs that track it. But at least for the ProShares fund, the shares are sold and the proceeds are reinvested in the remaining companies. The result could be that the fund's yield actually goes up, not down, he said.

Write to Paul Vigna at paul.vigna@wsj.com

(END) Dow Jones Newswires

April 28, 2020 17:22 ET (21:22 GMT)

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