The U.S. stock market has experienced a notable increase in common dividends during the three months ending in September, despite companies exercising caution. According to S&P Dow Jones Indices, dividend payments rebounded after a decline in the previous quarter. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, highlighted this rise in a note sent on Wednesday.
Notably, T-Mobile US Inc.’s dividend initiation of $3.1 billion and Microsoft Corp.’s $2.1 billion increase in dividends contributed to this growth. However, aside from these specific cases, the overall increase demonstrates a prudent approach by corporations regarding long-term dividend commitments. This caution seems justified due to higher interest rates and their potential impact on consumer spending, as well as uncertainties surrounding the economy.
Bond yields have been steadily rising since May and have further increased in the past 10 days. Investors have expressed concern about the Federal Reserve potentially maintaining higher policy interest rates for an extended period, even as the U.S. economy continues to perform well and with inflation still exceeding the 2% target.
As of the last trading day of September, Silverblatt calculated that the S&P 500’s dividend yield stood at 1.63%. Real estate and utilities stocks offered the highest dividend yields among the index’s 11 sectors at the end of the third quarter—3.89% and 3.72%, respectively. However, these yields are lower than what investors can currently obtain from the U.S. Treasury bond market.
The investment landscape is evolving, forcing investors to reassess their strategies. Matthew Tuttle, CEO and CIO of Tuttle Capital Management, points out the mismatch between owning dividend equity and the current yield on T-bills. With T-bills yielding over 5%, the allure of dividend equity diminishes due to the associated equity risk and relatively low yield, according to Tuttle.
Slump in Utility and Real Estate Stocks
The performance of the US stock market in the third quarter has been lackluster, particularly for the utilities and real estate sectors. Based on FactSet data, utility stocks (XX:SP500.55) have experienced a massive decline of almost 20% in 2023, while real estate (XX:SP500.60) has fared slightly better with an 11% drop over the same period.
Treasury Notes Provide Attractive Alternatives
Amidst the challenging market conditions, Treasury bonds have emerged as attractive options for investors. The yield on the two-year Treasury note (BX:TMUBMUSD02Y) was around 5.08% on Wednesday afternoon, providing a viable alternative for risk-averse investors. Additionally, six-month T-bills (BX:TMUBMUSD06M) yielded 5.57%, further highlighting their appeal.
Mixed Market Performance
Despite the overall slump in the market, there have been some positive developments. ADP estimates suggest that private-sector job growth slowed more than anticipated in September, causing some investors to reassess their positions. Ultimately, the S&P 500 (SPX) saw a 0.3% uptick in afternoon trading, while the Dow Jones Industrial Average (DJIA) experienced a slight dip of 0.1%. On the other hand, the Nasdaq Composite (COMP) advanced by 0.9%.
Outlook for Dividend Payments
As we approach the fourth quarter, there is cautious optimism regarding dividend payments for S&P 500 companies. Large caps seem to be weathering the uncertainties of the market better than their smaller counterparts, leading experts to predict a record dividend payment. Looking ahead to 2024, companies are likely to remain cautious due to uncertainties surrounding consumer and government spending, as well as the political environment.
In conclusion, the investment landscape continues to evolve, prompting investors to reevaluate their strategies. The recent performance of utility and real estate sectors, combined with attractive yields offered by Treasury bonds, underline the need for a carefully curated investment approach.