Earlier this week, Eddy Elfenbein has an interesting post discussing the 
“Bull Market In Dividends.” 

“For the third quarter, dividends from the S&P 500 grew by 10.96%. That’s the strongest growth rate in more than three years. It’s the 34th quarter in a row of dividend growth.

Over the last eight years, dividends are up 234%, which is pretty close to what the S&P 500 price index has done.

Considering how simple it is, the S&P 500 has tracked a 2% dividend yield fairly closely for the last several years.”

It is an interesting point particularly when you consider that there are a lot of dividends which have been “financed”through “cheap debt.” There is also the issue of record debt issuance by companies with marginal balance sheets at best or are walking “zombies” at worst.

As John Coumarionos noted earlier this week.

“Low interest rates have allowed companies that would have otherwise gone out of business to stay alive, and this has caused a tepid recovery. Chancellor notes the cumulative default rate on junk bonds during the entire recession was 17%, or “around half the level of the two previous downturns.” And while central bankers might view this as a victory, he views it as the cause of economic weakness.

The lessons for investors are to remain vigilant about stock valuations and higher yielding bonds. At some point, the zombies will not be able to sustain themselves any longer.”

This is an interesting point when you begin to think about the long-term history of dividends and what they represent with respect to long-term market cycles.

Let’s start with the notion that “dividends always increase.”

First, the statement is incorrect because during market reversion “cash dividends” DO NOT increase – but the YIELD does because of the collapse in prices. 

But, more to the point, that notion is only true, until it isn’t.

During the 2008 financial crisis, more than 140 companies decreased or eliminated their dividends to shareholders. Yes, many of those companies were major banks, however, leading up to the financial crisis there were many individuals holding large allocations to banks for the income stream their dividends generated. In hindsight, that was not such a good idea.