As companies sweeten dividend payouts, this is what investors need to know

On May 1, Apple announced a long-awaited dividend increase. The company, which is set to repatriate $283 billion into the United States, upped its payout, effective immediately, by 16 percent, from $0.63 per share to $0.73 per share. While its dividend yield is still a modest 1.56 percent, for the many investors who own the stock, a climbing dividend is a welcome development.

While Apple may be the most well-known company to raise its payout this year, it's by no means the only one. In fact, 2018 is on pace to be one of the best years for dividend increases.

From the start of the year through May 18, 187 companies have either increased or initiated a dividend, the second-highest number through the first five months of the year since 2011, according to S&P Dow Jones Indices. If 15 more companies do the same before month's end, this year will surpass 2015's 201 increases or initiations between January and May.

The average dividend increase is also climbing compared to the recent past. So far this year, payouts have risen on average by 13.85 percent, the fastest pace since 2014, when dividends rose, on average, for the full year by 17.5 percent. That's still relatively low — dividends grew on average by 26 percent in 2011 — but things are picking up.

Why the increase? With bond yields climbing, it may not be long before fixed income starts looking more attractive than stocks. Some companies want to counter that. "CDs are going up, so that will add pressure on yields," said Howard Silverblatt, an investment strategist with S&P Dow Jones Indices. "Companies are increasing dividends faster in 2018."

Still, it's not like it was in the years after the recession, where it seemed as if every company was increasing payouts. Between 2010 and 2014, which were some of the best years for dividend increases, investors were hungry for yield. They couldn't find income in low-yielding bonds, so investors were hoping the companies they held would up their payments.

And that's what they did. In 2013 and 2014, 366 and 375 S&P 500 companies increased their dividends, respectively — the two highest number of increases over the last 14 years. The amount of increases has slowed since then, but 2017 did see an uptick over the previous two years, with 351 dividend raises.

Michael Hodel, a portfolio manager of dividend strategy for Morningstar Investment Management, said that while we're not in the same search-for-yield environment as we once were, he isn't surprised that dividends are rising. One reason for the faster pace is related to America's new tax regime. "The tax act frees up cash held overseas and sharply reduces the amount of cash firms can expect to be trapped overseas in the future," he said.

Some companies, especially in the technology and pharmaceutical industries — sectors that have kept a lot of money overseas — are using their repatriated funds to increase share buybacks and dividends.

Indeed, these sectors count for a larger share of the total dividends paid among S&P 500 companies. In 2016 health care and information technology accounted for 12.02 percent and 15.49 percent of the total S&P 500 payouts, which currently stands at about $449 billion a year. That's increased to 12.78 percent and 16.06 percent, respectively. The sector's yields are still low compared to other industries and the S&P 500's 2.36 percent yield — tech pays a 1.77 percent yield, while health care pays 2.25 percent — but those numbers are growing.

"A lot of tech companies have matured over the last five or 10 years, so you are seeing more dividends pop up," said Hodel. "In a lot of cases, software companies are reaching maturity and becoming more comfortable paying out an increasing portion of earnings in dividends. Now that cash isn't getting trapped overseas, they're willing to commit to a dividend."

The tech sector will likely see more raises from here, said Paul MacDonald, chief investment officer with Oakville, Ontario-based Harvest Portfolio Group. "If you like dividend growers, then you should be looking at technology," he said, adding that there are opportunities across the industry, but the best ones are the businesses with already established technologies.

Some of the more traditional industry payers, like energy and consumer staples, haven't been nearly as aggressive as tech and pharma when it comes to dividend growth.

While consumer staples, with its 3.27 percent yield, still has the third highest payout among S&P 500 industries, its share of total dividends has decreased from 12.49 percent in 2016 to 11.13 percent today. As well, in 2016 36 staples companies listed on the S&P 500 were paying dividends — that's down to 32 today.

Staples' dividend decline is largely due to concerns over Amazon and Facebook, said Hodel. The latter is selling more and more goods online, and they're often selling them at a loss, while Facebook and other sites are making it easier for anyone to start a business. "Niche brands can start up by running digital advertising on Facebook," he said. "Amazon is becoming a threat to consumer product companies, and they're getting larger and pushing down pricing."

That's caused more traditional firms to merge and take on debt. "The sector is facing headwinds, and there's a preference for repaying debt than to growing dividends," he added.

As of mid-May, telecom, where only three companies pay dividends, has the highest payout, at 5.82 percent. Utilities is the second best-paying sector, with a 3.91 percent yield, while real estate, which is mostly made up of real estate investment trusts, is third, with a 3.89 percent payout.