Firms Turning to Dividends to Draw Investors

January 3, 2003 ( - In search of investors during a bear market, corporate America is increasingly turning to an old friend - dividends.

Dividend announcements saw an increase in 2002, as 1,425 companies made such announcements, up from 1,326 the previous year.   The increase was especially welcomed after two years in declines, even if it falls well short of 1978’s high water mark of 3,211, according to the New York Times.

As the number of companies announcing dividend payments increase, expectedly, the number of companies announcing reductions or omissions decreased, down 34.1% from 205 in 2001, to 135 this past year.  

However, more poignant is the dividend increase in the companies of the S&P 500.    In 2002 for the first time in three years, there was an increase in the number of firms issuing dividends.  Companies have historically shied away from cutting dividends, so it has been rare to see payouts reduced on stocks in the S&P 500. Only once before in the past 50 years had the S&P 500 dividend fallen for two consecutive years, and that was in the wage and price control days of 1970 and 1971, limiting companies’ ability to pay dividends.

Tax “Break”

Another possible reason for an increased interest is signals that President Bush will propose tax breaks for dividend recipients. Even though that announcement was made late in 2002, December saw 150 dividend increases announced, up from 121 in December 2001.

The gain may provide evidence that corporate America is willing to pay more in dividends to shareholders after a bear market that was far harder on companies that did not pay dividends than on those that did.

Bearish Tendencies?

The bull market of the 1990’s put little pressure on companies to pay high dividends, or any dividends at all. Wall Street urged companies to repurchase shares instead, pointing to the more favorable tax treatment of capital gains. Stock options also became more important as a portion of executive compensation, and dividends offer few benefits to option holders.

At its peak, in 1999, it looked as though dividend payments may go the way of the dodo as far as investors were concerned. The 402 stocks in the S&P 500 that did pay dividends rose by an average of 2.1% that year, compared the average gain seen in the 98 companies that did not make such payments of 89.8%.

However, even as declining markets have weighed on stock prices, last year stocks of S&P 500 companies that paid dividends declined by an average of just 18.4%, while the stocks of firms that did not pay dividends fell by an average of 30.3%.