Keeping the Dividend Party Going
Nobody likes tax time, but nowadays investors in dividend-paying stocks could be among the more contented filers. That's because a change in the tax code in 2003 slashed the rate on "qualified" dividends to 15% from 38.6%. In simple terms, qualified dividends are ordinary cash dividends paid by a U.S. corporation or by a foreign company whose shares (or American depositary receipts) trade in a major U.S. market. Payments received from real estate investment trusts, limited partnerships, or money market funds aren't qualified dividends.
The good news for investors is that more companies have been paying and increasing dividends since the maximum tax rate on these payouts was lowered (see BW Online, 9/28/05, "Make Room for Dividend Payers"). Even the notoriously dividend-averse technology sector has begun to come around. More than two dozen U.S.-based tech companies have started to pay regular dividends since the law changed.
Making a big splash in the dividends world was software giant Microsoft (MSFT), which paid a huge extra dividend of $3.08 a share in 2004 and now makes quarterly distributions of cash to shareholders. The list of tech companies that initiated regular dividends since 2003 also includes communications-gear maker ADTRAN (ADTN), semiconductor-equipment company Applied Materials (AMAT), online travel services provider Sabre Holdings (TSG), and programmable logic devices maker Xilinx (XLNX).
While some tech companies began paying a token dividend and have kept it modest, others appear to be converts to the dividend cause. The accompanying table shows eight tech companies that started making regular payments to their shareholders after the dividend tax rate changed, and have since boosted their initial cash distributions by at least 50%.