Dividends for the Long Term

Although more companies seem to favor dividends, investor reaction has been tepid. That could begin to change next year

By Joseph Lisanti

In the first 11 months of this year, there were 1,494 dividend increases reported to Standard & Poor's from a universe of about 7,000 public companies. That's up 17% and 24%, respectively, from the same periods in 2002 and 2001. Even so, the total lags behind the 10-year average of 1,617 dividend increases through November.

Among companies in the S&P 500 index, 212 increased their dividends this year through November, and 27 of them boosted their payments more than once. The index's indicated dividend now stands at 17.90, up from the 16.08 paid in 2002, and surpassing the previous high of 16.69 paid in 1999.

Dividends have gained popularity with issuing companies now that taxes on the payments are equal to those on capital gains. Next year, the first full year of lower taxes on dividends, increases in payouts and the reduced tax rate should mean an extra $55 billion for investors than in 2002, estimates Howard Silverblatt of Standard & Poor's Quantitative Services.

But so far, investors seem not to have noticed. This year through November, stocks in the S&P 500 that pay a dividend are up 26.9%. That doesn't sound bad, until you consider that the non-payers in the index rose 56.7% over the same 11 months. In part, that's because in the first year of a market advance, smaller, more speculative stocks (which usually don't pay dividends) tend to outperform the larger, higher-quality issues.

Dating the current upward move from the market low in October 2002, stocks are now in the second year of the advance. Generally, the larger issues start to perform better and the smaller ones rise a bit more slowly in the sophomore year of a bull market.

As that happens, investors should warm to the idea of dividend-paying stocks in their portfolios. Not a bad idea to warm to, since dividends have accounted for almost 42% of the total return of the S&P 500 since 1926.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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