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Dividend Investors to Get 15% Raise

The dollar amount of dividend payments underlying the S&P 500-stock index should increase 15% this year, according to estimates by Howard Silverblatt, senior index analyst at S&P.

That number might prove conservative.

It takes into account dividend boosts that have already been announced, as well as anticipated announcements from companies with a long history of raising payments.  It also includes Apple’s newly announced payment, which will take effect beginning in the second half of 2012.

However, the estimate doesn’t include the possibility that other cash-stuffed technology firms will follow Apple’s (AAPL)  lead and announce payments. Google holds cash and investments worth 20% of its stock market value, and is projected by Wall Street to bring in additional free cash this year worth about 6% of its stock market value. It pays no dividend and hasn’t regularly spent funds on share repurchases — an alternate means of returning cash to stockholders.

Google (GOOG) ranks No. 8 in the S&P 500 by stock market value, and the index gives more weight to larger firms, so any dividend announcement by Google could give index fund investors another noticeable pay raise. Amazon.com, eBay and Dell are among other tech firms with sizable cash surpluses relative to their market values.

Banks could provide even more upside to Mr. Silverblatt’s estimate. Historically large dividend payers, they slashed their dividends during the recent financial crisis but are gradually restoring them. Financial companies contribute 13% of S&P 500 dividends now, up from a low of 9% in 2009 and 2010 but well below the 29% they contributed in 2007. It’s difficult to predict when banks will restore their dividends, and Mr. Silverblatt isn’t counting on a normalization of bank dividends in his analysis.

Dividend increases hold several forms of appeal for investors. Some make stock prices jump right away; Apple rose 2.7% Monday. Rising dividends are also linked with share price increases over the long term, because they attract more attention from income investors.

Companies that raise their dividends are more likely than others to deliver greater-than-expected earnings in subsequent quarters, according to Columbia Business School professor Doron Nissim, who co-authored a study of the matter published in the Journal of Finance in 2001.  Dividend hikes also tend to reduce the likelihood of managers squandering cash, says Mr. Nissim, and they make companies more efficient by reducing idle cash and giving more weight to productive operating assets.

The S&P 500’s indicated dividend yield, assuming a level of 1400 for the index, stands now at 2.15%, up from 2.07% before Apple’s announcement. The yield at year’s end will depend on how stock prices change between now and then, and on which companies have the largest index weightings.

Three things bode well for long-term dividend growth, says Mr. Silverblatt. First, companies are aware of increased investor demand for yield. Last year, the Vanguard High Dividend Yield Index returned more than 10%, versus just over 2% for the S&P 500.  Second, despite a record 22 new dividends announced by S&P 500 companies last year, only 397 of the 500 now pay dividends, versus an average since 1980 of 413.

Third, dividend payments as a percentage of company profits now stand at about 30%, versus a historical average of 52%.

There are some wild cards to look out for, however. Safe-haven bonds have recently offered a pay raise of their own–because bond prices have fallen, pushing yields higher. The 10-year Treasury yield recently approached 2.4%, versus 1.9% at the start of 2012.

If that trend continues, it could lure investors away from dividend-paying stocks, and make companies less keen on boosting payments.  That seems unlikely, if only because the Federal Reserve said in January it plans to keep core interest rates “extraordinarily low” through 2014.

A larger obstacle could be taxes. The dividend tax rate is currently capped at 15%, but the cap expires at the end of this year.  Without action from Congress, the maximum dividend tax rate will revert to 39.6%.  If that were to happen, it might cause more companies to favor share repurchases over dividends, because the former don’t trigger taxes for investors.  Or, it might cause companies to continue holding onto their profits.

For now, a 15% increase in dividend spending is welcome news, especially among working investors who are finding it difficult to secure pay raises. Average hourly earnings for workers have increased just 1.9% over the past year, while inflation has raised the cost of living by 2.9%.

This story originally misspelled Doron Nissim’s surname, and listed his school as Columbia University instead of Columbia Business School.


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    • hi, i am jamil khan.i have done work in web research,

    • annuities are a big rip, esp. when you factor in the fees.

    • I think we need to consider the author and the company site from which we read these ideas. At first read, the article made a lot of sense. The second read of the article leads me to think the author advises high net worth clients as a consultant. The third read, and my last, makes me think his overall concepts are not geared to the wage earners at all (his last para). While it true there are tax changes coming next year, no one knows the extent of them. The lame ducks will likely help Obama get tax laws modified after the November election. Here is my takeaway from Jack Hough’s article. Dividend stocks need to exceed the current CPI rate just under 4%. Assuming inflation and average taxes of perhaps 25% on dividends means the dividend needs to be over 5% just to break even assuming static stock prices. S&P 500 dividend yield of 2.15% is less than half that. There are many excellent quality, high dividend stocks out there. I am neither an advisor nor a newsletter writer, just a retired math teacher and R&D aerospace engineer. We are long to mention just three UAN, CLMT, and TAL of them. These are solid companies in fertilizer, specialty chemicals in Midwest, and container leasing companies with excellent dividends. We considered the glitzy companies like Apple, Microsoft, and the mutual funds. But they are underperformers for producing increasing dividends over time with strong price appreciation over time. Our total ROI over time has been 18% and we anticipate 25% over 2012. We have not once failed to beat the S&P 500. But Vanguard, T. Rowe Price, and the raft of mutual funds have yet to match the S&P 500 much less beat them consistently. We lost tons of money in terms of opportunity costs with two major mutual funds who regularly appear throughout the WSJ and their employee writers. Both are Morningstar 5 stars. So I would not even consider any mutual fund, they simply do not perform and the media such as WSJ recommends them because these companies produce advertising streams to them. And they are not about the kill the golden goose who lays the golden eggs.

    • John Bevacqua’s site is pushing insurance. Dividends have the possibility of growth. His site pushes immediate annuities, an insurance product.

    • Don’t assume because of the latest news reel that dividend stock strategies are a sure way to create favorable income over the next 5, 10, or 20 years.

      Dividends are not guaranteed and corporations can reduce or eliminate dividends just as quickly as they increase them, regardless of their historical track record.

      To better understand different income strategies and their advantages and disadvantages, please feel free to review a recent blog I posted that discusses this point http://bit.ly/x0eUI3

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