We are quickly heading into the last quarter of 2010 while the stock market has been boiling for the past couple of weeks. After the worries generated by the PIIGS (Portugal, Italy, Ireland, Greece and Spain) back in May and the enormous US deficit, investors seem to be comforted by the good news coming from US companies. When we talk about good news, we also talk about dividend stocks maintaining or increasing their dividends. So let’s take a look at what happened in Q3 2010 in the world of dividend investing:
Q3 dividend stock review
The first thing I would say about Q3 is that the market has now reached a point of stability in term of dividend yield. Only 1% of the companies cut their dividends while 85% maintained them. If you are good in math, this leaves 14% of companies which actually increased their dividend yield over the last quarter. Among companies who increased their dividend payout the most, Industrial and Technology sectors accounted for 19% and 18% of them.
I recently wrote about a US Dividend Portfolio including 2 communication sector stocks (Verizon; VZ and AT&T; T). Well Verizon has increased it’s dividend during Q3 and AT&T is expected by financial analysts to do the same in Q4. While both dividend yields are over 5%, I still find the dividend payout ratio pretty high in both cases (77% and 145%).
However, while these 2 companies have or will increase their dividend, don’t think that the communications sector is the best place for dividend growth. In fact, the media have all the problem in the world to find profitability in the newspaper industry. Another interesting fact is the increasing merger and acquisition activity in this sector. While companies are spending on buying others, this obviously leaves less cash for dividend growth.
Looking toward the energy sector, pipelines seem to be the winner in this category. With the natural gas price depressed, coal mines closing and a stagnating oil price, pipelines are able to shine in the energy sector. They show both the highest dividend yield and the highest payout ratio. Pipelines are also expected to increase their dividend on a steady basis.
What to expect in Q4 2010 for dividend investors?
Here is the forecast for the next 12 months when you are looking at different indices.
It is quite obvious that if you are looking to invest in dividend stocks, the Dow Jones and the Canadian stock market seems to be the best places to be. I would be a little bit shy about both the Mexican and Brazilian markets as their economies is not as established and nor as diversified than ours.
This is why I would build an ideal dividend portfolio with US and Canadian stocks and forget about the other countries for now. It is harder to gather information and I think that we have enough in the North America Stock playground to dig into for now ;-).
What do you expect from the last quarter of 2010?
After enduring a disapointing Q1 and Q2, we saw the stock market head upward in Q3. Do you think that it will continue in Q4 and we will finish the year in the black or will more bad news arrive and destroy investor confidence again?
I see a struggling Q4 and a painful Q1. My reasoning is simply because the US and Canadian government are doing everything they can to hid the real impact of the depression and I foresee when they remove the band aid, there will be quite a wound underneath.
Interesting point of view but I think the opposite. While governements (mostly US and European) are having problem with their huge deficit, companies are full of cash, optimized (due to massive lay-offs in 2008) and ready to roll. If you pick strong companies, I doubt you will face any challenge in 2011…
Great post. I really enjoyed the graph, a good visual!
Yes, I too can see some struggles for the next few quarters, but as long as you own companies that have always paid dividends (at least the 85%), I don’t see a need to worry. Is that too bold to say? Am I being too thick-skulled on this? Maybe I will feel the pain if my dividends get cut. (Please no 🙁 )
I would agree with you but as we both know the market is affected by psychology. There are many great companies that get hurt because the news is bad.
I think you have a good point that they will weather the storm but due to fear I don’t foresee any real gains.
What are your thought on AGNC? in the future? Do you think they are tied to the interest rates?
Just attended a mtg of our local ShareClub and discussed the value of “yield on cost”. If we’re patient, buy a good dividend stock at a low price (which is surely coming), the compounding yield of the original investment begins to climb to far more than the annual yield. It’s the magic of the dividend buy and hold strategy. But buying low and sticking to the dividend aristocrats is key. OG