Dividend Payouts Take Center Stage

Thanks to the 2003 tax-law changes, many companies are changing the way they operate and paying more of their profits to their shareholders in the form of dividends.

Early in 2004, 370 companies in the Standard & Poor's 500 index were paying dividends to their shareholders — 19 more than in 2002.¹ And the size of those dividends was increasing, too. The average dividend yield for dividend-paying S&P 500 stocks was up to 2.02 percent.^2,3

Dividend payouts are more attractive because of their favorable tax treatment under the new law. Rather than being taxed at an investor's maximum federal income tax rate, which can be as high as 35 percent, qualifying dividends are taxed at a maximum rate of 15 percent.⁴

A Key Part of Total Return
Dividends have long been a key part of total return. From 1929 to 2002, the Dow Jones Industrial Average produced an average annual return of 11.31 percent. Of that, 4.3 percent came from dividends. This means that more than one-third of the index's returns could be attributed to dividends.⁵ Of course, past performance is no guarantee of future returns.

Dividends tend to act as a cushion in declining markets and can help boost returns in rising markets. If, for example, you own a stock with a 2 percent annual dividend and its share price dropped 5 percent, you would have a total loss of only 3 percent for the year. If the share price were to rise by 5 percent, you would have realized a total gain of 7 percent.⁶

As a result of the renewed interest in dividends and their favorable tax treatment, experts expect more companies to boost their dividends or to start dividend programs in the coming year. Of course, keep in mind that a company could decide to reduce or totally eliminate dividends in the future.

1) BusinessWeek, March 1, 2004
2) indexArb.com, 2004. The figure describes the average dividend yield for non-zero-dividend-paying stocks. Past performance is no guarantee of future results.
3) The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
4) The reduced tax rate on qualified corporate dividends is scheduled to expire on December 31, 2008.
5) Dow Jones & Company, 2004. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.
6) This hypothetical example is used for illustrative purposes only. It does not reflect the performance of any specific investment. Actual results will vary.

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