Stocks Surge as Plan Lifts Hopes
Rising excitement about dividend-paying stocks helped power sharp market gains Monday, extending Wall Street’s new-year rally.
Investors snapped up shares of major companies that pay above-average cash dividends, apparently on expectations that the Bush administration today will propose eliminating taxes on dividend income.
Among blue-chip indexes, the Dow Jones industrial average jumped 171.88 points, or 2%, to 8,773.57, and the Standard & Poor’s 500 index was up 20.42 points, or 2.3%, to 929.01.
But the gains were broad-based, even lifting many stocks that pay no dividends, such as technology issues.
The market’s rally in the first three trading days of the year has put it on pace for one of the fastest starts in at least 50 years, according to Stock Trader’s Almanac.
Analysts said the advance reflected hopes that the White House’s economic-stimulus plan, including tax cuts, will fuel a stronger business recovery across the board.
That could boost corporate profits, which would underpin stock prices and give investors more confidence that the 3-year-old market decline finally has run its course.
“I think the rally overall stems from a sense that there will be some kind of fiscal-stimulus plan,” said Subodh Kumar, investment strategist at brokerage CIBC World Markets in New York. Although the details are uncertain, it’s the expectation of helpful action that has given investors more reason to look ahead optimistically, he said.
Rising stocks outnumbered falling issues by nearly 3 to 1 on the New York Stock Exchange and about 2 to 1 on Nasdaq.
The rally extended to technology companies. The tech sector could be a big beneficiary if the economy picks up steam and drives up capital spending on equipment and services.
The tech-dominated Nasdaq composite index surged 34.24 points, or 2.5%, to 1,421.32.
But some of Monday’s biggest stars on Wall Street were old-line industrial, financial and utility companies that pay their shareholders substantial cash dividends each year.
The White House today is expected to propose elimination of income taxes on dividends. That could make dividend-paying stocks much more attractive to many investors, luring buyers.
The administration hopes that by jump-starting the market it would do the same for business and consumer confidence and spending.
Winners Monday included Eastman Kodak, which surged $1.24, or 3.3%, to $38.67, and utility Southern Co., which soared $1.70, or 5.8%, to $30.81.
Kodak’s annual dividend payment is $1.80 a share, which amounts to a 4.7% yield on the stock, based on Monday’s closing price. Southern’s annualized dividend yield is 4.4%.
Yields like those already are well above returns on money-market funds and on most Treasury bonds. The current yield on five-year Treasury notes, for example, is 3%.
The elimination of taxes on dividends would mean the effective yields on stocks would be even higher -- assuming companies maintain their dividends, which isn’t always the case.
Some analysts said they were doubtful that Congress would go along with a total elimination of dividend taxes. But even a cut in the tax rate to put dividend income on par with long-term capital gains -- which now are taxed at a maximum rate of 20% -- could help bring investors back to stocks after three dismal years, some experts said.
Such a shift also could have far-reaching implications for competing investments, such as Treasury bonds. Those securities might become less appealing at a time when federal deficit borrowing is likely to surge if the administration pursues its fiscal-stimulus ideas.
Indeed, as stocks have rebounded over the first three trading days of the new year, Treasury yields have surged because some investors have dumped bonds in favor of stocks.
The yield on the benchmark 10-year T-note rose to 4.05% on Monday, up from 4.02% on Friday and 3.82% a week ago. Some encouraging economic data in recent days have helped stocks.
Still, how far the market can rally on dividend-tax-cut expectations is uncertain. Many institutional investors, such as pension funds, already are exempt from taxes, and thus wouldn’t benefit from a new tax break. Likewise, many individual investors own stocks or stock mutual funds in tax-sheltered retirement accounts.
What’s more, the market continues to face major worries, including the potential for a U.S.-Iraq military conflict.
For Wall Street, starved for good news over the last three years, the tax-cut idea may be important more “for what it means psychologically, not the actual effect,” said Art Hogan, strategist at brokerage Jefferies & Co. in Boston.
