NEW YORK: US stock market bulls have had an unlikely ally in their four-month stampede – soaring dividends, the shareholder payouts that are making a strong comeback after 20 years in the wilderness.
Investors enjoying fattened cheques every three months have at least two recent developments to thank: lowered taxes on dividend income and the relatively poor return on fixed-income instruments.
And the dividend uptrend is expected to continue.
In the latest dip into company coffers, Citigroup Inc on Monday lifted its quarterly payout by a hefty 75% to 35 US cents per share. Three weeks ago, Bank of America Corp raised its dividend by 25% to 80 cents per share from 64 cents, while Goldman Sachs Group Inc doubled its payout to 25 cents per share.
“Nobody cared about dividends before; then the market came down significantly and it became more relevant. Now we began to see the upswing (in dividend increases), even before the tax changes,” said Howard Silverblatt, quantitative analyst at Standard & Poor’s.
The US Congress in May reduced the top tax rate on dividends to 15% through 2008, as part of a US$350bil tax cut. Meanwhile, the yield on the benchmark 10-year US treasury note is 3.65%. Also, the average one-year certificate of deposit (CD) yields 1.52% and the average two-year CD yields 1.81%, according to Bankrate.com.
For Citigroup, the dividend yield is now 2.9%, according to Silverblatt. For the entire S&P 500, the average yield is 1.28%. And of the 356 dividend-paying stocks in the group of 500, the yield is 1.79%.
Citigroup chairman Sanford “Sandy” Weill said in a statement that the recent change in the tax law “levels the playing field between dividends and share repurchases as a means to return capital to shareholders. This substantial increase in our dividend will be part of our effort to re-allocate capital to dividends and reduce share repurchases.”
Reversing a two-decade decline, the number of companies in the S&P 500 index that pay dividends had increased by five, from 351, so far this year, Silverblatt said.
“In 1983, 454 issues (out of 500) paid a dividend,” he said. “That went steadily downhill until 2000, when it stood at 372; then it was basically flat for the last two years during the downslide” in the stock market.
Also, he said, 124 issues in the S&P 500 had raised their dividends in 2003, compared with 104 increases last year.
Richard Cripps, chief market strategist for Legg Mason Wood Walker, expects more companies to raise their payouts.
“The dividend payout ratio is low compared to the historical averages. If you look at the past 50 years, the ratio of earnings paid out as dividends has been about 50%,” he said.
“All that has changed with the dividend tax law, but more importantly investors are recognising that returns are going to be below what they were, and dividends are going to be an important part of their portfolios,” he added. – Reuters