Forget earnings: Stocks have two big tailwinds pushing them higher

It's not just about earnings anymore: Dividends and huge inflows are helping stocks power forward.

April trading data is in, and it shows two surprises: an increase in dividends, and huge inflows into equities that are even stronger than the first three months of the year.

In April of last year, two dozen companies in the S&P 500 reduced or suspended their dividends. More suspensions and dividends came later in the year.

For April of this year, the opposite has happened: 33 companies in the S&P 500 announced dividend increases. None announced a decrease, and none suspended dividends.

Most importantly, 11 companies that had suspended dividends in 2020 began paying again in April:

Reinstating dividends
Ross Stores
TJX
HCA Health Care
Universal Health Services
Freeport McMoran
Estee Lauder
Kimco Realty
Darden Restaurants
Weyerhauser
Marathon Oil

Three of them — TJX, HCA Healthcare and Freeport McMoran — are paying higher dividends than they were before they suspended payments.

"The bottom line is, a year ago companies had no idea what was going on," Howard Silverblatt, senior index analyst from S&P Global Indices, told me. "Now there is much better clarity, and they are willing to put their money where their mouth is."

Will it continue? Silverblatt estimates that the overall dividend payout for the S&P 500 will increase 5% in 2021.

That would mean a payout to investors of about $515 billion, up from $483 billion in 2020.

"That is money in your pocket," Silverblatt said. "Remember, when a company pays a dividend, it is expected that it will keep that dividend going. That is a commitment from the company and they don't make that decision lightly."

Near-record inflows into ESG, thematic tech and other areas are also supporting prices.

Exchange-traded funds started the year just short of $6 trillion in assets under management, and inflows have continued on a consistent basis every month in 2021.

An extra $55 billion was put into equity ETFs in April, for a year to date total of $258 billion in equity inflows. 2021 will certainly see much higher equity inflows than 2020, when panicked investors threw money into bond funds.

"The money's coming from everywhere," Harry Whitton, senior vice president at Old Mission, an ETF market maker, told me. "There are people still sitting at home who are putting money into the markets. You are seeing huge interest in [Environmental, Social and Governance] ETFs. You are continuing to see money come out of mutual funds and into ETFs as well."

These inflows came despite a 30% drop in April equity share trading volumes compared to March, according to PiperSandler, and a similar 14% drop in equity options trading.

Why are there big inflows into ETF equity funds, and lower overall equity and equity option trading?

Nikolaos Panigirtzoglou, managing director at JPMorgan Chase, suggests retail traders are altering their trading patterns: "The behavior of US retail investors appears to be changing again, away from buying individual stocks or stock options and towards buying more traditional equity funds as was the case before the pandemic," he wrote in a recent note to clients.

Harry Whitton agrees: "We are seeing selling of fixed income ETFs and buying of equity ETFs. Maybe some of the Reddit crowd turned into long term investors. Or they got their tax bills."