Thursday, May 10, 2012

A Trend That Could Pay Dividends

With even the IRS on its side, the downtrodden dividend may be poised for a comeback. In September, the U.S. Treasury Department announced that it was more than tripling the reporting threshold for dividends, increasing from $400 to $1,500 the amount of dividend income that can be earned before taxpayers must file Schedule B with their Form 1040s. According to the IRS, this change will affect more than 15 million people, saving them a bit of paperwork on their 2002 tax returns.

This comes amid renewed interest in the advantages of dividends. Recent studies have found a link between a company’s dividend-paying proclivities and its stock market performance. In one, by Standard & Poor’s, companies in the S&P 500 stock index that paid dividends during 2000 and 2001 gained an average of 10.3%, while stocks with no dividends fell by 9.6%. Dividend-payers also outperform in the long run, according to the S&P report. The share price of companies that have steadily hiked dividends during the past 10 years increased fourfold, while the average S&P stock only tripled.

Yet many companies, strapped for cash or pursuing more tax-efficient ways to reward shareholders, have been cutting dividend payouts. The 3.5% drop in 2001 among S&P 500 companies was the biggest in half a century, and it followed a 2.5% decline in 2000. Dividend advocates such as Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School, decry that trend, contending, among other things, that actual payouts to shareholders are a much better gauge of a company’s financial health than earnings figures are, because the latter so frequently exclude so-called one-time costs that may significantly affect the company’s performance. Siegel wants Congress to alter the tax code to let companies deduct the cost of dividends, while others have called for exempting dividend income from individuals’ taxes.

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