Flush with cash and lacking exciting growth opportunities, many American companies have been about as “shareholder friendly” as they come over the past five years. Since 2010, dividends per share at S&P 500 companies have grown twice as fast as revenues. Alas, Credit Suisse believes the scope for further increases is narrowing. Dividend payments as a percentage of earnings are high compared to historical levels, particularly for the companies that pay the highest yields. What’s more, the HOLT FixedCharge Coverage ratio, a proprietary Credit Suisse measure that compares cash flow to fixed charges such as dividends, interest payments, and rent, is at a 20-year low. That suggests that even though companies have high cash balances – S&P 500 companies held $1.43 trillion on their books in the second quarter, the second-highest amount ever – they may not have the financial flexibility to increase their dividends in the future. Besides, much of that cash is concentrated in two sectors, tech and information technology, and a number of companies have cash parked overseas that they cannot use to increase dividends without paying a hefty repatriation tax. Credit Suisse’s Trading Strategy and HOLT teams, suggest that when choosing individual stocks or exchange-traded funds, dividend investors consider not only which stocks have the highest yields, but also those with high coverage ratios, which offer the added comfort of financial flexibility to increase dividends in the future.
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