Can Dividends Save The Economy?

Since the economic crash of 2008, Wall Street is still looking for more stimulus. Not only have they asked for low interest rates but also got a promise from the FED that they will be low for several years. They also asked for the FED to help in terms of economic stimulus which led to QE1 and QE2 (and are now anxiously waiting for a hypothetical QE3). They were not entirely satisfied so the FED also danced for them (Operation Twist with bonds). And now… Wall Street is seeking another kind of stimulus. At least, this time, it won’t come from the Government.

Letting Money Sleep In a Bank Account Is A Crime

I often use this line when I talk to people who let their money hibernate (‘cause the sleeping period is too short to describe this phenomenon) in their bank account without interest. Well, this is exactly what a lot of companies are doing right now.

The amount estimated as liquidity in companies’ bank accounts is at $2.23 trillion. This is the equivalent to 19% of the US disposable income according to Paul Ashworth from Capital Economics. When you think about it, huge companies such as Apple or Google should imitate Microsoft and start giving money back. This is exactly what Apple did by announcing its first dividend payout not so long ago. But when you think about it, how many companies could contribute sustainably to a higher dividend payout?

I was curious so I pulled out all US stocks over $10 paying at least a 2% dividend yield and a payout ratio under 50% and a dividend growth of at least 2%. My point is to know how many stocks could use a good part of their liquidity to increase their dividend payouts up to a payout ratio of 50%.

Stocks With a Huge Possibility of Dividend Increase

178 US Stocks:

20 CDN Stocks:

Obviously, this won’t happen tomorrow for several reasons. Some companies prefer to reinvest in their business, make acquisitions and others would rather pay off debts or start a share repurchase program, etc. But the point is that the potential is there. As investors, we can see how many stocks have the power to increase their dividend greatly and reward us.

The Dividend Impact on the Economy

If there was a massive dividend increase movement, I can see 2 very interesting impacts. The first one would be a great interest in these stocks. Every time that the market foresees a sustainable dividend increase, they are more likely to buy this stock for future payouts. Therefore, I guess this would be quite beneficial for CEO’s who wish to exercise some of their options in a near future ;-). This would probably push is into an official bullish market. For the past 2 years, analysts tend to say, after the fact, that “last year was bullish. It would be refreshing to hear them talking about the future for once.

This would lead to the other impact, that would probably be more important than just stocks skyrocketing (mind you, I’d love to see my portfolio get a solid boost!). If there are more dividends distributed to investors, it also means that there is more cash available to spend! Mr. Ashworth’s theory is that it could increase the population’s disposable income by 2%. This would create a great economic boost!

I think it’s an interesting theory since retirees would tend to spend a little bit more to enjoy life if they can count on stronger income. It would also give a break to defined contribution pension plan where companies have to make sure there is enough money to fund the pensions. If the market was ecstatic when there were those stimulus checks back in 2008-20009, I guess that “continuous” stimulus dividend checks would create a positive reaction on the overall economy as well.  In addition to that, even the Government would get its share in taxes. So the company sees its stock go higher, the investor sees more money coming in and the Government sees additional revenues. It sounds like a win-win-win situation for everybody!

The Problem is Volatility

Unfortunately, chances are that we won’t see tons of companies boosting their dividend to reach a 50% payout ratio. The economic volatility and uncertainty around the Euro Zone, the slower growth from emerging markets and the slow economic restart in the US are among the reasons why companies prefer being full of cash instead of distributing their liquidity. But I’m expecting to see some steady dividend increase from many companies in the years to come. Since profit is still rising, they will continue to hike their dividend and make some of us happy. I personally think that we are in the middle of an awesome investing opportunity where the stock you buy right now will provide you incredible yield in 10 years.

I can’t wait to write that I’m earning a 10% dividend yield on my INTC or KO shares in 10 years ;-).