By Stacy Trombino Will higher dividends -- and a greater number of companies paying them -- be one benefit of President Bush's reelection? His first term was certainly a boon to dividend investors, as the 2003 cut in the tax rate for dividends gave companies a greater incentive to distribute excess cash directly to investors
One prime example: Microsoft (MSFT
; S&P rank 5 STARS, strong buy; recent price, $27), recently approved the payment of a special $3-per-share dividend that will siphon some $32 billion from the software giant's legendary cash hoard. And Intel Corp. (INTC
; 3 STARS, hold; $24), another tech bellwether, recently doubled its quarterly dividend to 8 cents a share.
Some market watchers believe companies performed these actions before Nov. 2 on the assumption that John Kerry, if elected, would roll back the tax break. Bush's reelection suggests a rollback is unlikely. We at Standard & Poor's think the GOP victory will continue to encourage companies to use cash to reward shareholders.
Currently, 376 companies in the S&P 500 index pay dividends. Standard & Poor's now estimates that about 300 of those companies will increase their dividends in 2005. S&P expects the Bush Administration will succeed in maintaining the low, 15% dividend tax rate, though that will require new legislation. Under the current law, the 15% rate expires in 2007.
NEXT OBJECTIVE? Companies have ample resources to increase dividends, says David Wyss, chief economist at S&P. He notes that cash in the coffers of companies in the S&P 500 stands at about $599 billion. And he believes that, although some of the disbursements -- notably Microsoft's -- are clearly one-time events, meant in part to take advantage of the tax law, dividend payouts will remain higher, and more companies will begin regular payments.
This trend comes at a time when investors are showing greater interest in dividends. Wyss says capital gains appreciation potential in the future will probably be lower than in the go-go 1990s, when investors could rack up double-digit gains even without dividends. For the next few years, says Wyss, stock market appreciation is likely to be about 7% annually. In an environment like that, dividends can add a big boost to total return. Since 1926, dividends have represented 41% of investors' total return. Wyss says the current trend toward higher dividends is coming at a fortuitous time, just as the baby boomers are moving closer to retirement.
Standard & Poor's chief investment strategist Sam Stovall agrees. "In this challenging market, trading has been in a sideways pattern, and most investors are not being rewarded by share-price increases, so a higher dividend rate might be used to offset lackluster share-price appreciation," he says. Stovall does not think Bush will try to cut the dividend tax rate any further. Instead, be believes the President will try to make the existing cut permanent.
PERFECT TIMING. That could bolster the case for companies' boosting their payouts. Indeed, Standard & Poor's market equity analyst Howard Silverblatt says January and February of 2005 will be a busy time for dividend announcements, since most companies unveil dividend increases during those months. "At the beginning of the year, companies are preparing their annual reports and the annual shareholder meeting is coming up," he says. "What better time to announce a dividend payment increase?"
Silverblatt notes that although special dividends have not been popular since the 1980s, that could change. And there has been a lot of talk in the market lately about special dividends as well as increases. Given all the attention on Microsoft's big payout, the large amounts of cash companies have on hand, investor pressure, and a renewed emphasis on total return, the chatter may grow even louder as the new year gets underway. Trombino is an associate editor of Standard & Poor's MarketScope