Dividend Stocks With the Biggest Payout Ratios Outperform Buybacks

“Companies that are returning more of their excess capital to shareholders in the form of dividends have historically seen—and are continuing to see—incredibly strong performance,” says Patrick Pelfrey, co-head of quantitative research at Credit Suisse. “This is in contrast to buybacks, which are often viewed by market participants as a driver of share prices.”

A dividend payout ratio, in this case the percentage of earnings per share paid out in dividends, is a widely used metric by investors to get a sense of how much is being distributed to shareholders. The accompanying table includes a sample of companies that have high rankings for dividend payouts.

Credit Suisse’s May 29 note analyzed net buybacks and dividend payout ratios among companies in the S&P 500 index. For the latter, the researchers calculated the percentage of earnings per share paid out in dividends over the trailing four quarters.

Next they divided those companies into thirds based on the dividend payout ratio ranking—the higher the payout, the better the ranking. Pelfrey and his colleagues compared the top third against the bottom third, and they took a similar approach for buybacks. In compiling their rankings, Pelfrey also took sectors into account, as they draw from all 11 of the S&P 500’s sectors.

Over the 20-year period from Dec. 31, 1999, through Dec. 31, 2019, those companies in the top third by dividend payout ratio had an annual return of 10.9%, versus 6.6% for the companies in the bottom third, according to Credit Suisse. That superior performance has persisted since the onset of the pandemic in early 2020. The outperformance over that period—Dec. 31, 2019, through May 20 of this year—was 11.3% to 7.3% annualized.

The top-ranked companies on dividend payout ratios also outperformed those stocks with more robust buyback activity—10.9% versus 9.3% on an annual basis over the 20-year period that concluded at the end of 2019.

Since Covid emerged, meanwhile, things reversed for these two groups of stocks. The lower-ranked dividend payout stocks have returned 9.5%, compared with 6.2% for the top-ranked buyback companies over that period. The former group outperformed over that 20-year stretch, 9.3%% to 8.1% annualized.

Pelfrey says that stock buybacks can be “somewhat more volatile” and that they can “function as an outlet valve for excess capital, whereas dividends tend to be stickier.” He adds that one possible concern is a “slowing backdrop” for economic growth.

Meanwhile, the outperformance for those companies in the top third of dividend payout ratios since early 2020 varies by sector. For financials it’s plus 7.2 percentage points, and for technology companies, it’s plus 3.6 percentage points. Of course, the stock market’s broad rout in recent weeks has caused widespread losses, dividends and buybacks aside.

“It important to understand how the market rewards buybacks versus dividends—and I think it’s important to understand how those could perhaps change over time,” Pelfrey says.

Dividend Recovery Continues

Global dividends continued their rebound in the first quarter, jumping 11.1% year over year to a record $302.5 billion, according the latest version of the Janus Henderson Global Dividend Index. That compares with a 5% decline in 2021’s first quarter.

The jump in payouts reflected companies catching up after making dividend cuts or suspensions early in the pandemic, especially outside the U.S., and big dividends from energy and miners, says Matt Peron, director of research at Janus Henderson.

He expects dividend growth to normalize and “grow more or less at earnings growth.” Janus Henderson is forecasting a 7.1% rise in dividends in local currencies this year, or 4.6% adjusted for currency translation and other adjustments.

However, if an economic slowdown arises, dividends outside the U.S. “could be somewhat at risk,” he says, adding that he is confident about the health of U.S. dividends this year. In the U.S., Peron says, “if they have to, they’ll cut buybacks first.”

Most regions enjoyed big first-quarter dividend increases year over year. In dollar terms, those include emerging markets, up 41%; Europe excluding the United Kingdom, 14.9%; North America, 11.8%; and Asia Pacific excluding Japan, 9.2%.

In the U.K., dividends declined 21.5%, partly owing to fewer special dividends paid versus the same period a year earlier. Still, excluding currency translation, special dividends, and other adjustments, dividends increased about 14% in the quarter in that country. A similar result occurred in Japan, where dividends rose 13% in the quarter in local currency.

Deere Is Hiking Dividends Again

Deere (ticker: DE) held off on a dividend increase early in the pandemic, but since last year’s first quarter, the global heavy-machinery giant has been putting through steady hikes.

On May 23, the Moline, Ill.–based company said it planned to boost its quarterly payout to $1.13 a share. That’s an increase of 7.6% from $1.05. The stock yields 1.2%. The latest announcement of a dividend increase follows two raises last year—one in November to $1.05 a share, up nearly 17%, and the other in February to 90 cents a share, an increase of about 18%.

In recent years, however, Deere hasn’t put through a dividend increase every year. For example, it stayed at 76 cents a share from early 2019 through May of last year.

Corrections & Amplifications

Matt Peron is director of research at Janus Henderson. An earlier version of this article incorrectly called him Dan.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com