Increase in dividend payments may prevent double-dip recession

If executives were actually worried about a double-dip recession, then why are they starting to increase dividends? Writing checks to shareholders your butt can’t cash is not a way to keep your job.

"Companies did not increase dividends following the end of the 1980 recession, and rightfully so, since the economy double dipped in 1981," wrote Brian Belski, Oppenheimer Chief Investment Strategist. "This indicates that companies will not increase dividend payments until they are confident the economy and their business are growing on a sustainable path."

Over the last two quarters an increasing number of companies have started to raise their payouts, according to Belski, with all ten sectors in the S&P 500 now seeing net dividend increases.

The S&P 500 gained the last two weeks, recovering from a bull market correction, as companies such as Caterpillar and Target increased their dividends. Today, the Wall Street Journal reported that Verizon Wireless is weighing a dividend.

The Dow Jones Select Dividend Index Fund (DVY), an ETF that focuses on companies with high dividend yields and a consistent track record of payout growth, is starting to break away from the rest of the market, up 5 percent this year, compared to the barely 1 percent gain by the S&P 500.

One of the themes from Strategas Research Partners, founded and run by strategist Jason Trennert, is that dividends will become back in vogue and income will become a larger share of total return. They recommend the Select Dividend ETF, which counts Lorillard, Entergy, Chevron and VF Corp among its largest holdings.

Skeptics argue that the increase in dividends, along with share buybacks, is just a sign that companies don’t see growth opportunities ahead, but are sitting on way too much cash and have to do something. Analysis by Goldman Sachs shows that S&P 500 members hold about 10 percent of their assets in cash on average, the most ever.

Still, data from Belski shows this is how CEOs and CFOs start dipping their toe back in the spending waters. What better way to do so than returning a little income back to your shareholders. And if things hold up, capital investment is next.

For the best market insight, catch ‘Fast Money’ each night at 5pm ET on CNBC. 

Ref: http://www.cnbc.com/id/37832327

John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team

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