A year ago, companies were being gutted by the coronavirus lockdowns and companies were reigning in spending. Today, companies on the TSX and S&P 500 are reporting robust earnings and revenue growth.

It wasn’t supposed to be this way, third-quarter earnings were expected to be hit by headwinds from inflation, an uneven economic recovery, the supply chain crunch, and the ever-present COVID-19 pandemic. Better than expected third-quarter results have been a boon not just for the broader indices, but it also sets up dividend stocks for a period of epic growth.

How Have Third-Quarter Earnings Been?

For an earning season that was supposed to be bad, it’s turned out to be, for far, surprisingly good. Of those S&P 500 companies that have reported earnings, roughly 75% have posted better than expected numbers with the aggregate earnings per share beating estimates by close to 12%.

Analysts were calling for a much smaller earnings beat, closer to four percent above estimates.

For the entire S&P 500, the third-quarter estimated earnings growth is 27.6%. If this ends up being the actual growth rate for the quarter, it will be the third-highest year-over-year earnings growth rate since 2010.

Strong third-quarter earnings and positive economic data out of the U.S., coupled with strong commodity prices, have helped power the TSX into record territory. The TSX has actually been doing well since the stock markets crashed back in March 2020, rising almost 90%. As a result, Canadian companies have reported one of the sharpest earnings rebounds on record.

How Will This Impact Dividend Stocks?

During the pandemic companies pulled back on their capital spending and mergers and acquisitions. Because interest rates were so low, they were also able to borrow money cheaply, and renegotiate debt.

At the same time, because of the pandemic and ongoing uncertainty, global companies cut or suspended their dividends and stock repurchases. During the 2020 pandemic, global dividends crashed 12.2% to $1.26 trillion. Between the second and fourth quarters of 2020, dividend cuts and cancellations totaled $220 billion.

Dividend cuts were felt the most in Europe and the U.K. which accounted for more than half of payout reductions. Canadian and U.S. companies were able to protect their dividends because they suspended or reduced share buybacks instead.

This prudent spending has left many Canadian and American companies with more money than they had before the pandemic. For blue-chip Canadian stocks, this is expected to result in a dividend and share repurchase windfall in 2022 and 2023.

Of particular note, cyclical stocks, like financials, industrials, and consumer discretionary, have posted one of the strongest earnings rebound on record, but their dividend growth has slowed significantly. This suggests these companies are poised for above average dividend growth over the company quarters.

There are other sectors though that are facing bigger headwinds and may not be able to provide the kind of strong dividend growth that cyclical stocks can. Going forward, investors will have to be more involved in earnings season and keep an eye on a companies earnings and especially profit margins.

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Despite many headwinds, the third-quarter earnings season has been better than expected, this has not just boosted share prices to record levels, but it has also helped create a growth cycle that could see dividend payouts surge over the coming quarters. Not every sector will benefit, though. The trading professionals at Learn-To-Trade.com can teach you how to read economic cycles, spot market trends, and become more confident investors.

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