Investors Want to be Paid
What does the possibility of a an increase on the dividend tax mean for investors and companies that issue dividends? Senior Equity Income Strategist Linda Duessel discusses dividends and taxes.
Could a higher tax rate discourage long-time dividend payers?
We think the future is very bright for the divided oriented strategy, and we expect more companies to issue and raise dividends. Just witness what we've seen in these last couple of years in the technology sector and some of the big bellwethers for the first time initiating dividends and raising their dividends in a big way. What we see for the future with our country heavily indebted and probably that debt continuing to grow is that for the economy, that probably means that we will be going back to the days that we were experiencing prior to 1980. In the decades before then, you really didn't see a lot in the way of investors bidding up stocks because they go up, which was the attitude in the 80s and 90s. But rather, the way investors got paid by companies in terms of total return was dividends and the growth in the dividend. In a slow growth environment, like we think we'll see going forward an environment similar to before the 1980s, where this country was in a recession almost half the time. Before that time companies issued dividends, the average yield on the S&P 500 then was four percent. Today, it's two percent. Before 1980, the average company would pay out about 55 percent of his earnings in a dividend. Today, it's at a record low, 27 percent. At a time when investors are finding it very difficult to find yield out there, they are clamoring for companies to issue and raise dividends. Today what we see is companies across America have record corporate profits and record cash on their balance sheet, and yet a record low 27 percent of earnings being paid in dividends. Excuse me, corporate America, we want to be paid, and we will be paid. We think this idea has a long, long future.
What sectors have a strong commitment to dividends?
As we look for dividend paying stocks throughout our dividend oriented strategies, we tend to favor those sectors that have a long history of management culture, if you will, of issuing and raising their dividends. We love some of the names in the staple sector, for example. They have a bit lower yields but fabulous increases in their dividend stream. On the other side of it, we love some of the more stable telecommunications, for example, sectors that have high yields but offer slower dividend growth. Together they make an excellent combination, and we think that these sectors will continue on paying dividends as they have for the long history. But what's very, very interesting as we wonder about the future for sectors and the future for the importance of the dividend strategy, you look at the technology sector, which since the 1980s technology has been the quintessential growth sector. The companies would say, we're tech companies. We don't do dividends. What did we find just a month or two ago? Microsoft. Wasn’t Microsoft the poster child of the 1980s, and we don't do dividends? Most recently they raised their dividend by 25 percent. Here's a company that has lots and lots of cash on their balance sheet, now yields give or take three percent. Most recently, what is the coolest company on the face of the planet? Apple. Before Steve Jobs died, he thought dividends were silly. Now, the coolest company on the face of the Earth is issuing a dividend. If they think it's cool, I think lots and lots of companies will think that it's a great idea, too. I think that just the fact that a sector such as technology would start to embrace dividends again would argue that we will see this as a great way to invest for years and years to come.