3 Reasons Dividends Will Keep Climbing

by Marc Bastow | October 2, 2012 12:25 pm

According to Howard Silverblatt, senior index analyst at Standard & Poor’sĀ and as reported by[1] MarketWire, 2012 is now one of the most “dividend-friendly” years on record. Of companies in the benchmark S&P 500 index, fully 403 are paying dividends, the most in 13 years.

Indeed, August set a record with $34 billion in cash payments, and there have been approximately 250 dividend increases year-to-date, well ahead of last year’s pace and the best since 2003. Concurrent with the increases, the average dividend yield has improved to 2.2% this year, up from 1.9% in 2010.

Companies have many reasons for dividend increases, but for investors who reap the benefits, any reason is a good one. More to the point is why some of the bigger names in the S&P that don’t provide dividends — I’m talking to you, Google (NASDAQ:GOOG[2]) and Amazon (NASDAQ:AMZN[3]) — continue to hold out. But that’s another story for another day.

With all the talk about the possibility that our dysfunctional government will lead us all over the “fiscal cliff,”[4] a big question for investors, particularly those heading into or already in retirement, is what might be on the horizon for dividend policy.

A return to higher dividend (and capital gains) taxes will surely be on the table if Obama wins the election. And while Romney may strike a defiant pose against any changes, the final congressional makeup will have a lot to do with what plays out.

Still, I expect across-the-board dividend increases to continue no matter who wins and what the policy is. Here are three reasons why:

1) Lagging Stock Prices: From Caterpillar (NYSE:CAT[5]) to Federal Express (NYSE:FDX[6]) to Intel (NASDAQ:INTC[7]), companies are telegraphing lower revenues and earnings, and despite what was a robust third quarter for earnings and the stock market, it may not last. When those stocks that soared start to head back down to earth, investors will clamor for more dividends to cushion the blow and generate cash.

2) Tax Policy: No matter who’s living in the White House next year, changing the current 15% tax on dividends and capital gains (and on “carried interest” income) will be a battle royal. However, I can’t imagine a scenario in which everyone agrees that wholesale increases above a 20% tax is the way to go.

Given the Fed has indicated it will keep interest rates low for the medium term, returns on government securities, bank deposits and money market funds will stay low, forcing investors to seek out higher yields. Dividend increases should keep investors happy, as companies will likely try to offset any tax increases with one — or two — hikes of their own.

3) Executive Compensation: Remember that many corporate executives, in addition to the rest of us, collect dividends on corporate stock. Anyone sitting on exercised options that have lost value will at least take a look at dividends to ease the pain during down times. At least that’s the hope. The reality might be those same executives might rather boost EPS through stock buybacks, which appear to be all the rage today, for example at Exxon Mobil (NYSE:XOM[8]) and Microsoft (NASDAQ:MSFT[9]) to name just two.

Of course, investors should always monitor a company’s dividend policy for sustainability over the long term. Regardless of tax policy or stock price, if the fundamentals change, so should investors.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long MSFT and XOM.

Endnotes:
  1. as reported by: http://www.marketwire.com/press-release/2012-turning-out-to-be-the-most-dividend-friendly-market-in-years-nyse-pm-1706347.htm
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  3. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  4. the “fiscal cliff,”: http://investorplace.com/2012/10/the-fiscal-cliff-and-investment-opportunities-c-vasc-gm-an-jkhy/
  5. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
  6. FDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDX
  7. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  8. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  9. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT

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