There has been quite a bit of publicity about companies sharing with workers the benefits of the corporate tax cut enacted last December, in the form of bonuses and additional retirement plan contributions. As it turns out, many are sharing the newfound wealth with shareholders also. More than a fifth of the companies in the S&P 500 boosted their dividends in the first two months of this year, and the average increase has been 14%. More good news: No one in the S&P 500 cut a dividend through the first two months of the year.
This news goes hand in hand with the fact that the companies in the Dow Jones Industrial Average increased earnings by 10.5% in the fourth quarter, and that 74% of the reporting companies in the S&P 500 beat analysts’ expectations for their earnings in that period.
Even so, rising interest rates may cut into the appeal of stocks. Since 2009, the dividend yield on the S&P 500 has been well in excess of the yield on the two-year Treasury bond. Those bond yields were below 0.5% until 2015, but they have since climbed to over 2.27% in February. At that level, the income from the bond beats the dividends from the stocks.
Most market observers don’t anticipate a major rotation from stocks to bonds until Treasury interest rates reach 3% or so—but that could happen later this year. The Fed already has indicated that additional interest rate increases are in the cards.