Monday, June 28, 2010

Will dividend increase be short-lived?

First of all, we should note that dividend yields are still quiet low from a historical perspective (i.e. long term).  That said, they have come back somewhat and are more prevalent now than a decade ago (when even Fama and French were writing on the Demise of the Dividend) and this year we are seeing more firms both initiate as well as increase dividends.

So what happened? Several things. The Internet bubble burst and investors (at least temporarily) remembered that stocks do not just go up. Then came Enron and the governance crisis of the early 2000s. As investors were painfully reminded that accounting numbers could not always be trusted, the signaling aspect of dividends came to the forefront (it is harder to play games with cash than it is with accounting numbers). And in the last, but definitely not least, in the US there was a reduction of taxes on dividends (remember dividends come out of corporate earnings and hence the double taxation problem).

In the following piece, the WSJ points out that this year firms are paying more than last year (when they conserved more cash during the "great recession". But the article also reminds us that the lower tax rate on dividends is up next year. It will be interesting to see whether it is reapproved.

Dividends Are Back -
"Corporate balance sheets, which were squeezed during the recession, are once again brimming with cash. S&P 500 nonfinancial companies had a record $837 billion in cash at the end of the first quarter, up from $665 billion a year earlier, according to S&P.

Of course, there are plenty of headwinds. The tax rate on qualified dividend payments, capped in 2003 at 15%, is set to expire at the end of this year along with some other Bush-era tax cuts. Absent congressional action, the top dividend tax rate will jump to 39.6% next year."
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1 comment:

Christie Malry said...

Of course, it would help if the Obama could adopt a more mature rhetoric towards BP, one of the biggest dividend payers on the FTSE-100, instead of its shrill, heavy-handed thuggishness. The behaviour of your politicians towards Tony Hayward was totally unacceptable in a democratic country, even when you take their understandable anger into account.

Obama may yet kill the goose that lays the golden eggs; will US and UK savers thank him for his short-termism then?