Good news, bad news. Record dividends paid to investors in 2023, but buybacks plunged

Good news for long term investors: corporate America paid a record amount in dividends last year, even as the S & P 500 approached a near record high. That's good news because reinvested dividends are a critical part of long term shareholder wealth. The bad news: another favorite way of indirectly returning cash to investors — share buybacks — were down big last year.

A record year for dividends In 2023, companies in the S & P 500 paid out $588 billion in dividends, a new record. Dividend payouts: another record year (S & P 500 cash payout, billions) 2023: $588b 2022: $564b 2021: $511b 2020: $483b 2019: $485b Source: S & P Global Tha's an increase of 4.2% over 2022, smaller than in 2022 and 2021, when dividend payouts climbed by 10.4% and 5.8% respectively.

Why is the payout increase lower than in prior years? Because dividends are a product of cash flow, and the more free cash there is to distribute, the more comfortable companies are with raising dividends. Howard Silverblatt, senior index analyst at S & P Global, notes that, "cash flow was strong last year, but companies have been cautious about the state of cash flow due to uncertainty about the economy." Buybacks are down significantly Full numbers for the fourth quarter are not yet available, but estimates indicate that buybacks were down significantly in 2023.

S & P 500 Buybacks: $780 billion (estimate) ( 15.4% year over year) Dividends: : $588 billion (+4.2% year over year) Source: S & P Global The biggest factor in the decline in buybacks has been the banking crisis. In the third quarter of 2023, for example, banks bought back $29.3 billion in stock.

Two years earlier, in the third quarter of 2021, they bought back $61.9 billion. Bottom line: banks cut their buybacks, but for the most part protected their dividends. Why Wall Street loves buybacks over dividends The difference highlights why corporate America loves buybacks: share repurchases can be quickly ramped up and just as quickly cut off without upsetting investors, whereas dividends cannot be easily cut without upsetting investors who become accustomed to a cash payout.

As a result, companies are cautious about raising dividends too much because they are very difficult to take back. In recent years, as cash flows have improved, "buybacks grew quicker than dividends, so [in 2023] companies have been quicker to pull back on buybacks," Silverblatt told me. "Dividends move a lot slower." Dividend yields are stable but lower than historic norms The dividend yield for the S & P 500 is currently 1.5%.

That is on the low side of the historic norm. S & P 500 dividend yield history (average yield) Since 1936: 3.49% Last 10 years: 1.83% Last 5 years: 1.67% 2023: 1.5% Source: S & P Global Why has the dividend yield been going down? First, years ago most companies paid a dividend; today only 80% of the S & P 500 do.

Second, with the exception of 2022, stock prices and particularly the S & P 500 have been on a tear. Higher prices cause lower yields, thanks to simple math. Most of the S & P 500 pays a dividend Most companies pay a dividend, but more large cap companies pay a dividend than mid and small cap firms.

Who pays dividends? (% of index members who pay a dividend) S & P 500: 80.1% S & P MidCap: 65.8% S & P SmallCap: 57.8% Source: S & P Global In the S & P 500, 328 companies (65%) increased their dividends (dollar payout) last year. Twenty companies (4%) dcut their payout. Four of those that decreased their dividend were energy stocks: Devon , Coterra Energy , Pioneer Natural Resources and Diamondback Energy .

Companies that paid out the most dividends Just as there is a small group of companies that account for an oversized portion of buybacks, there are several companies that historically have very large dollar payouts, though not all have outsized dividend yields. Last year, just six companies paid out 15% of all the dividends in the S & P 500.

Largest dividend payers Microsoft $22.3b (0.8% yield) ExxonMobil $15.2b (3.7% yield) Apple $14.0b (0.5% yield) JPMorgan $12.1b (2.4% yield) Johnson & Johnson $11.5b (3.0% yield) Verizon $11.2b (6.8% yield) Source: S & P Global Not surprisingly, these companies have among the highest revenues, and generate strong cash flow.

And many, such as ExxonMobil, Johnson & Johnson and Verizon, historically pay a high dividend. Companies that bought back the most stock We don't yet have fourth quarter numbers, but here are the companies that bought back the most stock in the first three quarters of last year. Largest buybacks (through Q3 2023) Apple $61.2b Alphabet $45.3b Meta $18.6b Microsoft $16.0b ExxonMobil $13.1b Source: S & P Global Dividends are a study in the power of compounding interest Dividends are a critical part of the long term profits associated with owning stocks.

A 1.5% dividend yield may not seem like much, but many investors reinvest the dividends they receive, and the returns compound over the years . Those compounded returns are a key component in generating stock market wealth. Since 1926, the S & P 500 has returned an annualized total return (price plus dividends) of 10.37% a year.

Of that, almost 40% of the return has been due to reinvested dividends. Total return S & P 500, 1926 2023 Avg. yearly return: 10.37% Price as % of total return: 62% Dividend as % of total return: 38% Sourc e: S & P Global Modest rise in dividends, assuming no shocks Assuming no dramatic events (such as the banking crisis last year), Silverblatt expects another year of modest increases in dividends.

"Incorporating the start of the [Federal Reserve] interest rate reductions at the end of Q2 2024, no significant economic downturn and no major adjustments to government fiscal policies (with the expectation of continued policies and incentives), I would expect an approximate 4.5% 5.0% increase in the actual cash payments for 2024 (to USD $618 billion) over the 2023 level, which would be the 15th consecutive year of increases and the 13th consecutive record year for the S & P 500," Silverblatt said.

What could go wrong? Dividends depend on cash flow. Strong cash flows will enable corporate America to continue to raise the payout, even modestly. A pullback from consumers, or a sudden change in corporate tax structure, or a shift in government spending, could all cause companies to stop raising dividends.

Silverblatt notes January and February are crucial for setting the tone for the entire year. "February is very important, because companies are putting out their annual reports for the prior year, and there is no better time to increase your dividend than before you report to shareholders. February is the biggest month by far for dividend increases.".