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Don't Count Your Dividend Chickens

Published Fri, 22 May 2020 07:49:32 -0400 on Seeking Alpha

In times of stress, companies tend to cut share buybacks first, which are viewed by investors as more discretionary, before touching dividend payouts.
The mid- and small-cap sectors that pay out the most in dividends are Financials and Real Estate, making up a disproportionate amount of the Dividend Stream weight.
While the WisdomTree U.S. LargeCap Dividend Index has shed under 3% from its indicated Dividend Stream in 2020, the mid- and small-cap dividend indexes have seen cuts of 17-24%.
, CFA
Investors can normally rely on the stability of dividends. A company cutting its dividend is typically a significant negative signal in U.S. markets, making cuts rare among the largest dividend payers. In times of stress, companies tend to cut share buybacks first, which are viewed by investors as more discretionary, before touching dividend payouts.
But 2020 has been far from normal times.
And within mid- and small-cap companies, the picture for dividend cuts has been more challenged than for large-cap companies. Investors would be remiss to count their dividends before they are paid out.
Who Pays Dividends This trend of smaller companies more significantly slashing payouts isn't surprising. During an economic slowdown, smaller companies usually have less credit access to sustain cash flows and thinner profit margins, making them relatively more burdened by a sales slowdown.
The number of mid- and small-cap dividend payers had been increasing in the years since the financial crisis. The nearly 70% of companies in the Russell Midcap Index that paid dividends was nearly a 20-year high. This means there was a healthy and diverse base of companies paying out dividends before cuts began - particularly for mid-caps.
Percent Index Constituents Dividend-Payers

The mid- and small-cap sectors that pay out the most in dividends are Financials and Real Estate, making up a disproportionate amount of the Dividend Stream weight. In the Russell Top 200,... Read more