The dividend situation may be improving. Earnings of companies in the S&P/TSX composite index gained in December and January, while indicated dividend payments have been inching higher since this past September.

Most important, dividend yields show signs of rising — although their level is controlled by bond-market yields, which show no sustained hint of rising.

The risk is the high dividend payout ratio, which is currently 84% on the S&P/TSX composite index. Although that is historically high, the payout ratio has always been volatile.

The uptick in earnings, dividends and yield is the first break in the collapse that began in the autumn of 2008. Earnings on the S&P/TSX composite index dropped by 58% from the January 2009 high to the low this past November, while indicated dividends dropped by 23% from the high in August 2008 to September 2009.

Throughout 2009, the Toronto Stock Ex-change recorded that 19 companies had cut their dividends, as well as 56 dividend omissions. The amount of the dividend cuts averaged 52%.

Even worse for your income-seeking clients was the drop in yields. The yield on the S&P/TSX composite index had climbed from 1.5% in 2002 to a stable 2.5% level through 2006 and 2007. With the collapse of stock prices, the index’s yield soared to 4.2% early in 2009, when the market crash was approaching its bottom.

Lately, the index’s yield has dropped to 2.7%, with the usual variation among industries within the index.

Indicated dividends by companies in the S&P/TSX composite index currently total $34.8 billion. Banks alone account for $10.3 billion; their dividend yield is 4.3%. Historically, bank stock yields have been higher than the yields of the composite index; in fact, they were as high as twice the S&P/TSX composite index’s yield in 2005. Throughout 2008 and 2009, bank stock yields have ebbed above and below 1.5 times that of the index, where they currently stand.

Despite the global financial crisis, Canadian bank stock yields stand higher relative to the broad Canadian market than at any time in the past two decades.

Income trusts’ contribution to dividends and distributions has dropped sharply as firms in the sector prepare to become taxed as corporations. Distributions have increased since hitting a low of $7 billion in August 2009, but are still half their peak total. Earnings are also half their 2007 peak level, but, like other sectors of the market, rallied a bit in December and January. Income trust yields now average 7.8%, having almost reached 15% at the market low early in 2009.

The second-largest dividend-paying industry is insurance, with a current $3.1-billion indicated outlay. Insurance stocks have gained in appeal because their current 3.5% yield has risen to 1.3 times the composite index’s yield.

After a stumble in 2008, telecommunications services dividends have been rising. The sector’s indicated payout is $3 billion and the subindex’s yield has appeal — it is 5.4%. The risk is the dividend payout ratio, which, at 83% of earnings, is high.

The energy sector is now the third major source of dividends, and not just because the S&P/TSX energy subindex includes pipelines. Overall, the energy sector’s payout stands at $10.2 billion, of which $2.5 billion comes from pipelines and $5.5 billion from exploration and production companies.

The good news here for investors is that energy earnings increased in December and again in January after being halved since late 2008. Dividend payments reached a low in May 2009 and have risen by 8% over the past six months. Although the energy subindex’s dividend yield is 2.9%, the pipeline (energy storage and transportation) subindustry index yields 4.8%. This industry’s earnings have been little affected by the recession, and the rise in dividends has not been affected at all.

Utility stocks have dropped in importance as dividend-payers, with the sector providing only $1 billion. Dividends in the sector have changed little over the past four years, but, with the rise in share prices in 2009, utilities’ yields have dropped back to the 5% level — close to their 2006 high. IE