Sunday, January 21, 2001
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Posted on: Sunday, January 21, 2001

Dividends persevere in fast-paced society

Associated Press

NEW YORK — One of the less discussed peculiarities of the the financial marketplace in the year 2000 was the decline in dividends, those partial payouts of earnings that old-time investors relied upon.

Standard & Poor’s announced that the payout rate for stocks in its S&P 500 stock index slipped to just 2.5 percent last year, the first decline since 1991 and the biggest decline since 1951.

It says a lot about how much the marketplace has changed.

You don’t hear nearly as much about dividends today as you do about prices, because these are times when many newer investors are in pursuit of quick money, and it takes long years of dividends to make you rich.

In fact, those who do rely on dividends are likely already to be rich, rather than - as so many are today - merely striving to be rich.

Investors today want quick capital appreciation, whereas dividends at, say, 3.5 percent a year, double only after 20 years or so.

Besides, the new market has even netted some of the rich old-timers, and you can’t blame them. Neither can you blame the companies who in the spirit of the times substitute stock buybacks for dividends.

Buybacks promote higher prices, which is in tune with the times. In contrast, big dividends have long been associated with safe but maybe slow-growing companies. Faster growers reinvest in the company.

Finally, as if companies and investors were seeking to rationalize the situation, it is frequently pointed out that dividends are taxed as ordinary income, while the levy on capital gains is at a lower rate.

The result: The number of dividend increases reported to Standard & Poor’s in 2000 totaled 1,496 — a 12 percent decline from the 1,701 reported in 1999. It was the fewest number of increases since 1992.

But now the tone of the market has changed. It may take a while for companies to adjust their strategies, but in a slower- growing market it can be assumed that dividends are likely to regain some lost popularity.

As S&P’s weekly commentary, "The Outlook," puts it, "investors are likely to start seeking a tangible reward for share ownership and put increasing pressure on corporations to pay out more."

An assumption underlies such expectations, it being that companies have profits to distribute, which assumes that the economy will continue to grow, if more slowly, rather than go into a tailspin.

Despite the slowdown in annual increases, dividends almost certainly are here to stay, especially as the population ages. Retirees, of which there’ll be a growing number, tend to prefer sure dividends over risk.

Still another factor will be at work: Also getting older will be those companies that forego dividends today in the race to grow larger.

And as they slow down, they might need the lure of dividends to attract investors.

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