Next week on Wall Street: dividend aristocrats turn to market turmoil

NEW YORK Companies in various industries are cutting or suspending their dividends to cope with the economic fallout from the coronavirus epidemic, complicating the stock selection process for fund managers who want to strengthen their portfolios with a steady stream of income.

The fall in oil prices last week has potentially accelerated this process, raising concerns about the stable dividends from companies like Exxon Mobil and Chevron Corp, which are expected to release their results on Friday May 1.

The S&P 500 Aristocrat Dividend Index, which tracks companies that have increased their dividends each year for the past 25 years and includes Exxon and Chevron, has declined by about 19% so far in 2020 as of Thursday , more than the 12.9% drop over this period for the S&P 500 Total Return Index.

This is bad news for yield-hungry investors at a time when payments on US Treasuries are near their historic lows as the Federal Reserve keeps interest rates in check to stimulate the economy. . Dividend yield on S&P 500 recently exceeded 10-year benchmark US Treasury yield by its highest margin in almost five decades.

At times like these, financial strength and dividends are two of the essentials when making your investment choices, said Alan Lancz, President of Alan B. Lancz & Associates Inc. is not just the dividend yield, but the sustainability of that dividend.

Lancz strengthened its positions in stocks such as UPS, Cisco and Merck during the market downturn, in part due to the financial strength and dividends of these companies.

(GRAPH: lower dividends – https://fingfx.thomsonreuters.com/gfx/editorcharts/gjnvwegxkvw/eikon.png)

Investors have been particularly focused on the energy patch, where a drop in oil into negative territory has put pressure on a wide range of companies for the first time.

Norwegian Equinor said on Thursday that it was cutting its quarterly dividend by two-thirds as part of an effort to preserve liquidity, while oil services company Schlumberger NV cut its dividend by 75% earlier this month.

The dividend yield of Exxon of 8% and that of Chevron of 5.9% are the second and third largest of the Dow Jones Industrial Average behind the only chemical company Dow Inc of 8.6%, according to data from Refinitiv.

Morningstar equity analyst Allen Good said investors are more concerned about the dividends from Exxon and Chevron than they have been in the past, but the payments appear to be safe at the moment. The debt levels of the two companies remain relatively low while dividends “occupy an important place on the list of financial priorities” for management, he said.

AbbVie, 3M Co and Aflac, which are on the dividend aristocrats’ index, are also expected to release their first quarter results next week.

Other companies that have recently taken action on their dividends include casino operator Las Vegas Sands, cruise ship Carnival Corp, and clothing retailer Gap Inc, which have suspended payments.

This profit season, where companies must essentially commit to the dividend or not, will determine some potential turnover in the shareholder base, said Margaret Reid, senior portfolio manager at The Private Bank at Union Bank .

In fact, some companies in areas of the market that have held up well have recently increased their dividends, including consumer staples Costco Wholesale Corp and Procter & Gamble and diversified healthcare company Johnson & Johnson.

These companies can however be outliers. Goldman Sachs expects overall dividends from the S&P 500 to drop 23% to $ 398 billion in 2020 after increasing each year over the past decade.

For some companies, in order to preserve cash flow during the economic downturn, it would make sense to cut or suspend the dividend now, said Keith Lerner, chief market strategist at Truist / SunTrust Advisory Services.

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Nick Zieminski)