The Effects of Rate Cuts on Dividend Stocks During a Recession

Historical performance of dividend stocks during rate cuts

Historically, dividend stocks like Exxon Mobil, Johnson & Johnson, and Procter & Gamble have demonstrated resilience during economic downturns, maintaining or increasing dividends even amid rate cuts. This commitment underscores their strategy to provide consistent returns to shareholders, reinforcing the stability of dividend-paying stocks in challenging times.

"We remain committed to paying dividends through the very lows of the commodity price cycles, like we did in 2020 during the depths of the pandemic, when some of our peers cut dividends." --- (XOM, event transcript, 2024/05/29)

"Dividends During the three months ended March 29, 2024 and March 31, 2023, the Company paid dividends of $99 million and $101 million, respectively." --- (KO, sec filing, 2024/Q1)

"We appreciate the value our investors place on the dividend, and we were pleased to announce this morning that our Board of Directors has authorized a 4.2% increase marking our 62nd consecutive year of dividend increases." --- (JNJ, earning call, 2024/Q1)

"In April, we announced a 7% increase in our dividend, again reinforcing our commitment to return cash to shareowners." --- (PG, conference, 2024/06/04)

"We've grown our annual dividend for 41 consecutive years. And now that that acquisition has closed, we increased our go forward share repurchase program to a $20,000,000,000 a year pace." --- (XOM, event transcript, 2024/05/29-31)

Impact of lower interest rates on dividend yields and policies

Lower interest rates can lead companies to reassess their dividend policies, as seen with AT&T's focus on balancing dividend yield and equity value. Walmart's significant 9% dividend increase reflects a proactive response to economic conditions, indicating that lower rates may encourage more generous dividend distributions.

"And so, as I've said before, we'll evaluate at that time where things like interest rates stand, we'll evaluate where we are on the dividend yield relative to the equity value, and where we have opportunities for reinvestment in the business and kind of understand what we think the right combination of those are." --- (T, earning call, 2024/Q1)

"The impact of a 100-basis-point change in interest rates affecting our floating rate debt would result in a change in annual interest expense, including our interest rate swap agreements that are designated as hedges, of approximately $389 million." --- (VZ, sec filing, 2024/Q2)

"The 9% increase in the dividend we announced for the current fiscal year is the largest increase in more than a decade." --- (WMT, event transcript, 2024/06/05)

"The company's Board of Directors declared a quarterly dividend of one dollar and sixty-three cents ($1.63) per share, payable September 10, 2024, to all holders of common stock as shown on the transfer records of the corporation at the close of business on August 19, 2024." --- (CVX, press release, 2024/08/02)

"The impact of a 100-basis-point change in interest rates affecting our floating rate debt would result in a change in annual interest expense, including our interest rate swap agreements that are designated as hedges, of approximately $399 million." --- (VZ, sec filing, 2024/Q1)

Investor sentiment towards dividend stocks in recessions

Investor sentiment towards dividend stocks during recessions is bolstered by companies like Cisco, which emphasize strong cash positions and free cash flow. Their commitment to returning capital through dividends and share buybacks reassures investors, enhancing confidence even in economic downturns.

"The net decrease in cash and cash equivalents and investments from fiscal 2023 to fiscal 2024 was primarily driven by a net outflow for the acquisition of Splunk of $27.5 billion, cash returned to stockholders in the form of cash dividends of $6.4 billion and repurchases of common stock of $5.8 billion, repayment of debt of $1.8 billion, net cash paid for our other acquisitions, excluding Splunk, of $1.3 billion and capital expenditures of $0.7 billion." --- (CSCO, sec filing, 2024/Q4)

"We believe that our strong cash and cash equivalents and investments position allows us to use our cash resources for strategic investments to gain access to new technologies, for acquisitions, for customer financing activities, for working capital needs, and for the repurchase of shares of common stock and payment of dividends as discussed below." --- (CSCO, sec filing, 2024/Q3)

"We further regard free cash flow as a useful measure because it reflects cash that can be used to, among other things, invest in our business, make strategic acquisitions, repurchase common stock, and pay dividends on our common stock, after deducting capital investments." --- (CSCO, sec filing, 2024/Q3)

"We've returned about 93% of free cash flow over that same time frame, obviously from driving both the dividend and the share buyback. So I think we've had a strong track record on cap allocation and the way we've thought about how we can use that to drive shareholder value." --- (CSCO, event transcript, 2024/06/04)

Future outlook for dividend stocks with potential rate cuts

Dividend stocks like Apple and Alphabet are poised for growth, with both companies committing to increasing dividends despite economic uncertainties. Apple's 4% dividend hike and Alphabet's new quarterly dividend reflect confidence in sustaining shareholder returns amid potential rate cuts.

"We are also raising our dividend by 4% to $0.25 per share of common stock, and we continued to plan for annual increases in the dividend going forward as we've done for the last 12 years." --- (AAPL, earning call, 2024/Q2)

"And finally, we look at returning capital to shareholders. We were very pleased to announce in April that we would add a quarterly dividend of $0.20 per share to our capital return program as well as a new $70,000,000,000 authorization in share repurchases.To address the second part of your question about dividend reinvestment plans, we understand that a number of brokerages will offer the option for reinvestment of our dividend, so please check with your broker for their reinvestment options." --- (GOOG, event transcript, 2024/06/07)

"We are also raising our quarterly dividend for the twelfth year in a row. Apple's board of directors has declared a cash dividend of $0.25 per share of the Company's common stock, an increase of 4 percent." --- (AAPL, press release, 2024/05/02)

"Finally, as I trust you saw in the press release, we are very pleased to be adding a quarterly dividend of $0.20 per share to our capital return program, as well as a new $70 billion authorization and share repurchases." --- (GOOG, earning call, 2024/Q1)

Comparison of dividend stocks vs. growth stocks in recessions

During recessions, dividend stocks like Qualcomm and Amgen demonstrate resilience by maintaining or increasing dividend payouts, reflecting a commitment to returning capital to shareholders. In contrast, growth stocks may prioritize reinvestment over dividends, highlighting a key difference in their financial strategies during economic downturns.

"As a result of stock repurchases and quarterly dividend payments, we have an accumulated deficit as of March 31, 2024 and December 31, 2023." --- (AMGN, sec filing, 2024/Q1)

"On March 5, 2024, we announced an increase in our quarterly dividend per share of common stock from $0.80 to $0.85, which is effective for dividends payable after March 21, 2024." --- (QCOM, sec filing, 2024/Q2)

"As a result of stock repurchases and quarterly dividend payments, we have an accumulated deficit as of June 30, 2024 and December 31, 2023." --- (AMGN, sec filing, 2024/Q2)

"We currently intend to continue to use cash dividends as a means of returning capital to stockholders, subject to capital availability and our view that cash dividends are in the best interests of our stockholders, among other factors." --- (QCOM, sec filing, 2024/Q1)

"We intend to continue investing in our business while reducing our debt and returning capital to stockholders through the payment of cash dividends and stock repurchases." --- (AMGN, sec filing, 2024/Q1)

Risk factors for dividend stocks during economic downturns

Dividend stocks face significant risks during economic downturns, including shifts in consumer behavior, supply chain disruptions, and broader economic factors like government actions and inflation. These elements can adversely affect business performance and investor confidence, impacting dividend sustainability.

"A failure, whether real or perceived, to address environmental and social impact matters or to achieve progress on our environmental and social impact initiatives on the anticipated timing or at all, could adversely affect our business, including by heightening other risks disclosed in these Risk Factors, such as those related to consumer behavior, consumer perceptions of our brand, labor availability and costs, supply chain interruptions, commodity costs, and legal and regulatory complexity." --- (MCD, sec filing, 2024/Q1)

"Economic conditions can be impacted by a variety of factors, including hostilities, epidemics, pandemics and actions taken by governments to manage national and international economic matters, whether through austerity, stimulus measures or trade measures, and initiatives intended to control wages, unemployment, credit availability, inflation, taxation and other economic drivers." --- (MCD, sec filing, 2024/Q2)

Strategies for investing in dividend stocks during rate cuts

Investing in dividend stocks during rate cuts involves focusing on companies that maintain strong cash flows and commit to returning capital to shareholders. Firms like Berkshire Hathaway, Mastercard, PepsiCo, and Starbucks emphasize responsive cash management and consistent dividend payments, making them attractive options in a recessionary environment.

"And I said that in the annual report because yields are so much higher than they were last year. And we have a lot of fixed short term investments that are very responsive to the changes in interest rates." --- (BRK.B, event transcript, 2024/05/04)

"The aggregate amount of this dividend was $616 million. On February 6, 2024, our Board of Directors declared a quarterly cash dividend of $0.66 per share paid on May 9, 2024 to holders of record on April 9, 2024 of our Class A common stock and Class B common stock." --- (MA, sec filing, 2024/Q2)

"Financing Activities During the 12 weeks ended March 23, 2024, net cash provided by financing activities was $10 million, primarily reflecting the proceeds from issuances of long-term debt of $1.8 billion and net proceeds of short-term borrowings of $1.5 billion, partially offset by the return of operating cash flow to our shareholders through dividend payments of $1.8 billion and share repurchases of $0.1 billion, as well as payments of long-term debt borrowings of $1.3 billion." --- (PEP, sec filing, 2024/Q1)

"Use of Cash We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facilities, commercial paper program, and the issuance of debt to support and invest in our core businesses, including investing in new ways to serve our customers and supporting our store partners, repaying maturing debts, returning cash to shareholders through common stock cash dividend payments and discretionary share repurchases, and investing in new business opportunities related to our core and developing businesses." --- (SBUX, sec filing, 2024/Q2)

"During the third quarter of fiscal 2024, our Board of Directors approved a quarterly cash dividend to shareholders of $0.57 per share to be paid on August 30, 2024 to shareholders of record as of the close of business on August 16, 2024." --- (SBUX, sec filing, 2024/Q3)