Dividends bounce back - Finance

SINCE THE 1980S, companies in the S&P 500 that pay dividends to their stockholders have been a vanishing breed. But this year, that trend has turned around--in a big way.

Although the numbers change on a daily basis, as of the end of October, 19 companies on the index had initiated dividends this year, including such well-known names as Best Buy, Microsoft, and RadioShack. "Standard & Poor's has been tracking the steady decrease in dividend payers since the 1980s, and this year marks the first substantial increase in two decades," says equity market analyst Howard Silverblatt. Not only are more firms paying dividends, more are increasing their dividend rates as well: the number of firms hiking their rates jumped more than 9 percent from last year, to 193 from 177. And 26 of those boosted their rates more than once this year. "We're not talking about small numbers; the average is 19.5 percent," declares Silverblatt. United Technologies, for instance, pumped up its rate 10.2 percent in April and another 29.6 percent in September. Citigroup cranked up its rate 11.1 percent in January and 75 percent in July. And Kinder Morgan elevated its rate 50 percent in January and 166.7 percent in June.

One of the driving factors is the federal tax cut that took effect in May. Praxair Inc., a Danbury, Conn., producer of industrial gases, for example, increased its dividend rate twice this year--13.2 percent in January and 25.6 percent in October-in large part because of that legislation. "It caused us to reconsider increasing the overall payout ratio to a higher level," observes CFO James S. Sawyer.

With the legislation--which reduced the dividend tax rate to 15 percent--dividends have gained a new cachet in the executive suite, says Sawyer. When dividends were taxed as ordinary income, he explains, there was an incentive to buy back stock rather than pay dividends, because the tax rates on capital gains and dividends were the same. Now, while dividends and long-term capital gains are taxed at the same rate, he says, "there's a slight advantage to dividends over capital gains, because short-term capital gains are taxed at a higher rate."

Silverblatt expects dividend rates to continue to rise for the foreseeable future. "The earnings are there, the ability to pay is there, and the yields are historically low," he says.

BY THE BOARD

In November, the SEC approved new rules from the NYSE and Nasdaq on corporate governance, including new guidelines for independent directors.

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