At Arm's Length: 12.10.04

The New Thinking on Dividends

The old thinking was replaced during Mr. Bush's first term. When the tax cuts that the President manage to wrangle into place limiting the amount of taxation on dividends was enacted, investors rejoiced. Calling it the elimination of double taxation, the favorable status for dividend paying stocks now looks to be stable until the end of his second term.

The question is, with companies increasing dividends, why aren't these stocks taking off?

Two things need to be in place for any significant return to be had from dividend paying stocks. In the S&P 500 for instance, corporate cash flows have been very strong. But that cash has not necessarily found its way into dividend payouts. Historically, about half of what goes in goes back out in dividends paid to shareholders. But companies, for some reason open to speculation, have kept a good deal of this influx of profit close to the vest. Even with the payers carrying the index for the most part - the nonpayers have actually declined for the first three quarters of the year with a total return of just under 4% - investors aren't flocking toward these stocks or the funds that index them.

But, if companies are forced to expense their options in the future, expect dividend payers to show their true worth, dividends to increase, and those that have placed their bet on the tried and true performers to be laughing all the way to the bank.

The previous week's articles.

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