MARKET SAVVY : What’s Behind the Stinginess in Dividends

Should the cash dividend be on the endangered-species list?

The number of U.S. companies raising cash dividend payments to shareholders in August totaled just 78--the lowest for any month since September 1992, Standard & Poor’s Corp. says.

That continues the trend of a growing corporate reluctance to raise dividend payments. For 13 consecutive months, S&P; says, the number of dividend increases has trailed the year-earlier period.

In July and August combined this year, just 199 companies raised dividends, down 25% from the same period in 1998 and down 37% from the 1997 period.

In general, companies are more generous with dividends when corporate profits are rising, and they forgo dividend increases when profits are weak.

That accounts for some of this year’s more miserly corporate approach to dividends: Although earnings of many blue-chip companies have resurged this year, many smaller and mid-size companies have struggled to post earnings gains.

Overall, “it’s been a very, very poor year for dividend increases,” said Arnold Kaufman, editor of S&P;’s Outlook investment newsletter in New York.

Meanwhile, the number of companies opting to omit dividend payments entirely--usually a sign of severe corporate distress--totals 55 so far this year, up from 39 in the 1997 period, S&P; says.

Many companies have de-emphasized cash dividend payments in the 1990s, preferring to use earnings to buy back stock on the open market rather than pass more profit through to shareholders.

And that approach has been widely sanctioned by many shareholders. Why? Dividends are fully taxable when paid, whereas long-term capital gains are taxed at much lower rates.

So if a company can help drive its stock price higher via share repurchases, that is potentially worth more to investors than a cash dividend payment that will be heavily taxed.

“Shareholders aren’t out there demanding dividends,” Kaufman concedes.

That contrasts with the 1960s, ‘70s and early ‘80s, when more investors were concerned about earning a decent dividend yield on their stocks. The typical yield today--that is, annual dividend divided by the stock’s price--is a pittance.

The slower pace of dividend increases, coupled with the stock market’s sharp advance since 1994, has reduced the average dividend yield on blue-chip stocks to just 1.2%.

Some Wall Streeters argue that dividend income will come back into style someday, but probably not until the bull market stumbles and capital gains become far less certain.

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Fewer Firms Boost Payouts

The number of major U.S. companies raising cash dividend payments to shareholders peaked in the first quarter of 1998. In recent months the pace of dividend increases has slowed dramatically. Number of increases, by period:

1st quarters

1997: 644

1998: 659

1999: 575

2nd quarters

1997: 496

1998: 530

1999: 407

July through August

1997: 315

1998: 265

1999: 199

Source: Standard & Poor’s Corp.