Dive
Into Dividends
Considered
by some to be old-fashioned, dividends brought handsome gains to many investors
in 2004. Dividend increases were at the highest point since 1998.¹
This improvement is likely a product of three factors: rising corporate profits,
greater cash flow, and favorable tax treatment for dividends.
Good for Companies
Strong economic growth in 2004 contributed to increased earnings for
corporations. By the end of the third quarter, corporate earnings had risen
17.1% over the previous four quarters.² Higher profits expanded cash flows. For
example, cash flows for companies in the S&P 500 reached record highs last
year.³ More cash gave these and other companies the flexibility to raise
dividends, with the dual purpose of rewarding shareholders and potentially
boosting stock prices.
Generally speaking, a company's dividend is a sign of its financial strength, or
lack thereof. In 2004, the number of companies that increased their dividend
rose 7.2%, marking the third consecutive year of increases. Conversely, the
number of companies that either cut their dividend or omitted it altogether fell
by 38.4%.4
Great
for Investors
Recent
dividend increases are particularly good news for shareholders in light of the
2003 tax law changes that reduced taxes on dividends to a maximum rate of 15%.5
Previously, dividends were taxed at ordinary income tax rates,
which today reach as high as 35%. On a $7,500 dividend, the reduced tax rate
results in an additional $1,500 gain.
Before the tax
law took effect, some argued that dividends were out of date — that companies
could better return value to their stockholders by buying back shares. Today,
the increased potential for gain offered by the tax break, along with a greater
desire among shareholders to protect against market volatility, has led to a
resurgence in dividend popularity.
In an environment of economic growth, high cash flows, and favorable tax laws,
dividend increases may be expected to continue in 2005.6
Please call if
you would like to evaluate the role of dividend-producing securities in your
portfolio.
1, 3–4) The San
Diego Union-Tribune, January 4, 2005
2) Haver Analytics, 2005
5) The 15% maximum tax rate on qualified corporate dividends will expire after
December 31, 2008, unless Congress extends the tax-law provision.
6) The return and principal value of stocks fluctuate with changes in market
conditions. Shares, when sold, may be worth more or less than their original
cost. Past performance is no guarantee of future results.
