NEW YORK: Shareholders will pocket US$9.2bil more from Standard & Poor’s 500 Index companies in the next year, thanks largely to President George W. Bush’s dividend tax cut. To some investors, the increase suggests further gains are ahead for US stocks.
Since Bush signed the tax reduction into law in May, 54 members of the S&P 500 have either raised quarterly dividends or started making a payout, according to Bloomberg data. AT&T Corp, Citigroup Inc and Wells Fargo & Co are among them, and the average increase has been 28%.
The added cash may prompt investors to buy more stocks after a three-year bear market that pushed down the S&P 500 by half, said Ted Bridges, who helps manage US$1.1bil at Bridges Investment Counsel. Higher payouts are seen as reflecting management's confidence that earnings available for dividend payments would increase.
Citigroup, the world’s biggest financial company, has made the biggest dividend increase of the quarter. The company, citing the new tax cut legislation, announced on July 14 that it would raise its payout by 75% to 35 US cents a share.
The increase accounted for US$2.9bil of the US$9.2bil total for all 54 companies that have increased or introduced payouts, according to Bloomberg calculations.
AT&T, the biggest US long-distance phone company, will raise its dividend by 5 cents, or 27%, to 23.75 cents a share. Wells Fargo, the fourth largest US bank is boosting its payout by 50% to 45 cents a share. And Harrah’s, the second largest casino company in the United States, will pay 30 cents a share quarterly.
Investors increasingly are looking for dividends, an about- face from the 1990s, when share buyers sought capital gains as stocks surged. The Nasdaq Composite Index returned 41% a year, on average, from 1995 to 1999.
Dividends under the new law are taxed at 15%, down from the top rate of 38.6%. The capital gains tax paid on assets owned longer than a year has been lowered to the same rate from 20%.
“The tide has turned, and people are going to look less for capital gains in the stock market and more toward dividends,” said Doster Esh, who helps manage US$5bil at Chartwell Investment Partners. “Companies that raise their dividends over time tend to outperform, and we think it will be true going forward.” – Bloomberg
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