Bye-Bye Dividends 26 comments
-
Font Size:
-
Print
- TweetThis
Stock dividends are in jeopardy on multiple fronts. This is not good news for equity income investors or the US stock market overall. Four forces are converging on and against US dividends:
- Companies are cutting dividends or not raising them
- Tax trap in existing dividend tax rules
- Congress will legislate higher dividend taxes after 2008
- Possible legislative mandate for TARP participants to suspend dividends.
The delicate condition of investor psychology, the simple math of dividends as part of total return, and the comparative yield opportunities in developed foreign markets, suggest that declining dividends would depress US stock prices.
Implications:
If US stock (SPY, IVV) dividends decline, bonds (AGG, IEF, MUB) would become relatively more attractive. Foreign developed market stocks (EFA, VEA) would become relatively more attractive.
Simply put, US stock prices would decline.
Dividend oriented funds (DVY, VIG, SDY) would possibly suffer most. Foreign developed market dividend focused funds (IDV, DWM) would possibly be more attractive than US dividend funds, although they would suffer the same tax problems as US dividend funds.
Company Dividend Actions:
WSJ, Oct 21:
The prospects for dividends remains extremely cautious,” added Mr. Silverblatt [senior index analyst at S&P], specifically highlighting financials. Nonetheless, he noted more than half of all dividend-paying S&P 500 members expected to boost outlays in 2009. Among them won’t be General Electric Co., which recently announced plans to not hike its dividend in 2009 for the first time in 33 years.
CNN, Oct 27:
… the recent surge in dividend cuts could accelerate as more companies run into financial trouble. S&P on Oct. 21 reduced its estimate for the collective annual dividends paid this year by S&P 500 companies by 80 cents per share from $28.85 to $28.05.
S&P also expects total dividends paid by S&P 500 companies for the fourth quarter will drop 10 percent, to around $60 billion from $67 billion in the fourth quarter of 2007, the biggest year-to-year decline since 1958. Some fear more companies will feel free to cut dividends now that a trend has set in.
Wall Street Journal, Oct 29:
More real-estate investment trusts are expected to sacrifice their dividends as broader market turmoil drains their liquidity and hinders debt refinancing.
LaSalle Hotel Properties said last week that it cut its annual dividend by 51% to provide $100 million in liquidity over the next 26 months. The hotel REIT, whose shares have fallen more than 70% so far this year, is considered to be in the vanguard.
… Rich Moore, an analyst at RBC Capital Markets, said REITs aren’t being rewarded for their rich dividends amid dramatic stock-market declines. “I think you are going to see more [dividend cuts] because they can take the money and pay off debt,” he said.
Current Dividend Tax Trap:
Market Watch, Oct 21:
If a dividend-paying company fails to make a profit this year amid the financial turmoil, and consequently doesn’t pay federal income taxes, dividends that investors take as cash could be taxed at a 35 percent rate rather than the typical 15 percent for so-called qualified dividend income, Silverblatt [senior S&P index analyst] said.
New Dividend Tax Rates:
If Obama wins, which seems probable, and if the Congress becomes controlled by Democrats, which seems possible to probable, the favorable tax treatment of both dividends and capital gains will be reduced. Some talk is of reclassifying dividends as ordinary income, and ordinary income tax rates will rise too.
That would be bad for stock prices, and worse for equity income stocks and their investors in particular.
Possible Congressional Mandate to Suspend Dividends:
There are trial balloons going up in Washington about a possible ban on financial companies from paying dividends if they receive government aid under TARP.
The financial sector accounts for about 15% of the S&P 500 market cap, and generates high yields compared to the other sectors. If major banks stopped paying dividends, the yield on the S&P 500 would decline significantly more than it would otherwise. That would probably have strong negative impact on stock prices.
Washington Post, Oct 30:
“The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program,” said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.
Bloomberg, Oct 31:
House Financial Services Committee Chairman Barney Frank said banks using cash from the $700 billion U.S. rescue plan for bonuses, acquisitions and other purposes unrelated to lending are in “violation” of the law.
“I am deeply disappointed that a number of financial institutions are distorting the legislation,” Frank, a Massachusetts Democrat, said in a statement today. “Any use of these funds for any purpose other than lending — for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. — is a violation of the terms of the act.”
Senators Dodd and Sanders intend to take steps to limit uses of bailout money for bonuses and to extend government powers to reclaim money without the need for bankruptcy, if the money is not used as intended. They are only talking about executive compensation for the moment, but if the “no-dividends” idea is blended in, the outcome will not be good for US stocks.
Bloomberg, Oct 31:
"When you invite the government into your living room, which is what you’re doing with the TARP program, I can’t guarantee you they’re going to be a good guest in your house,” said Gerard Comizio, senior partner at Paul, Hastings, Janofsky & Walker LLP and former deputy counsel at the Office of Thrift Supervision. “This program is basically a work in progress."
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 26 comments:
Do people not think?
I agree with all your concerns, but we get all tied up in our specific items and concerns and forget about the bottom line, which is, Obama and his kind have never contributed anything positive and Obama and his kind will drag us down to their cultural level by their criteria (which we stupidly accept), i.e. beggars deserve and have the right to take the Worker's earnings.
Famos
There are still some real steals out in dividend land. The Canadian oil royalties have been hammered in price and current yields are 20%+. Adjusted for currency exchange and withholding tax the yields are still over 15%. And there are many American Master Limited Partnerships paying tax-favored dividends of 10% and more.
This is NOT you father's stock market.....
Perhaps they're just pushing all of us with substantial savings/investment toward annuities. At least there you can get guaranteed interest rates.
Go back to sleep, or back to school perhaps.
On Nov 03 10:47 AM famos wrote:
> Hi Commentors,
>
> I agree with all your concerns, but we get all tied up in our specific
> items and concerns and forget about the bottom line, which is, Obama
> and his kind have never contributed anything positive and Obama and
> his kind will drag us down to their cultural level by their criteria
> (which we stupidly accept), i.e. beggars deserve and have the right
> to take the Worker's earnings.
>
> Famos
>
I wonder how many of us trust our advisor or other "professional" to structure our retirement money for us?
If you were concerened about your dividend income, you or your "advisor" should have considered that at some point in your lifetime, taxes might go up on this income. It's called planning.
Under Clinton, the cap gains tax was 20% on dividends. Had you invested and continued to invest into a Roth from that point until today, (I believe Roth was availablke starting in late '97) than you would be pulling 10 years worth of that dividend income free of all tax!
Just think about it...
And to the others that claim to live solely off dividends, you need to quickly reexamine the word "diversification."
You tell me what I meant or thought for saying "his kind" and "their cultural level". It would appear to most to be ambiguous, but lets hear your meaning of my words. Be careful, it might prove you to be a raciest.
famos
I see some problems with your IRA suggestion. Since dividends have been taxed preferentially in the past few years, it would have increased the taxes to the maximum by putting dividends into an IRA, because all money coming out above cost basis is ordinary income.
For investors who have assets outside of their IRA, they need to do something with them and dividends may have been most consistent with their needs and goals.
Also some investors have far more outside of the IRA than inside. For example, if a person sold a business for millions and had hundreds of thousands in their IRA or other tax deferred vehicle, there would be no way to confine dividends to the IRA.
It may be that dividends will be taxed at ordinary rates in the future, in which case the IRA argument becomes more suitable. However, because of capital gains potential with common stocks, securities with the least cap gains and most ordinary income should go into the IRA first -- such as bonds.
On Nov 03 09:56 AM prairiedog555 wrote:
> I am a retiree and live off dividends, I cannot imagine anyone with
> dividend paying assets even considering a vote for Mr. Obama. Or
> anyone who has studied any of the prior recessions consider voting
> for him at this time. His idea of raising tax's now will be a disaster.
>
> Do people not think?
I don't agree, although I am retired. When voting you must take into consideration the plight of the majority, who don't enjoy dividends and interest as a form of unearned income. Your taxes are doing good for others. Is this un-american?
I am a retiree and live off dividends, plus Social Security and modest pension. I am voting for Obama. I makes me sick to see the direction this country has taken under George Bush and the Republicans. I have also supported Barack Obama financially. I do not have a lot of money nor am I a millionaire.
Think a little before commenting. It shows your ignorance. And that goes for all of you. Period.
On Nov 03 11:50 AM freddie wrote:
> Wow, Famos, at least you honestly express your prejudice and warped,
> distorted view of just who has been "taking the Workers earnings."
>
>
> And to the others that claim to live solely off dividends, you need
> to quickly reexamine the word "diversification....
Not sure if it's "un-american" but it sure sounds like "spread the wealth" which seems a lot like Socialism. If I am going to help someone less fortunate than I am I want to decide who that will be and how it will be done, not have it decided by some bureaucrat while siphoning off a chunk for himself and the "system". Mandatory do-gooding is not in the true spirit of generousity.
"Your taxes are doing good for others," It's not about taxes doing good or bad, it's about taxes being increased. We know we have to pay taxes, and we're fine with it - many of us don't even want further tax decreases as we feel the level right now is fair. But don't start raising taxes dramatically so you can give MORE social programs to those who do not work or did NOT save for retirement. We don't mind helping out, but why punish those who are barely scraping by, but are currently self-sufficient? Why punish those that took the time to save for retirement so they would be self-sufficient.
Perhaps the MOST American thing is to be self-sufficient so you can afford to help your country, and not be a drain on it - something those receiving social benefits should consider when they see a backlash against such tax proposals. We aren't against helping them, but don't go and give them a raise and make self-sufficient retirees take a pay cut, or we may also have to start receiving some of those social benefits and may become a net drag on the system.
Sometimes the best way to help your country is to help yourself become self-sufficient first, then worry about helping others. You can't help your country if you don't take care of yourself first.
I think what has happened is Obama has done something called class warfare. How do you think Hitler got elected in a Democracy? I believe he blamed a certain group of rich businessmen... How about Obama stop using class warfare to divide us? The rich aren't to blame for all the ills in society, so don't act like they are. With all the "rich hating", it's a wonder our rich bother to stay, instead of move every penny of assets off-shore. Maybe they are more patriotic than you think, and remember, most of them did not start out wealthy... That was the beauty of the American system - a system where upward mobility was allowed and even encouraged. If America doesn't want it's successful corporations, businessmen and self-sufficient retirees, another country will.
On Nov 03 12:52 PM Boubou wrote:
> I am a retiree and live off dividends, plus Social Security and modest pension. I am voting for Obama. I makes me sick to see the direction this country has taken under George Bush and the Republicans. I have also supported Barack Obama financially. I do not have a lot of money nor am I a millionaire.
So you like the socialist style of giving.
Check out a video on you-tube from a speech made by Ezra Taft Benson, Secratary of Agrculture arount the early 60's.
If you like the idea of giving up everything you worked all your life to achieve, then why aren't you giving more to the people you claim need so badly without having the government tell you what they are gong to do with the money you earned?
On Nov 03 01:41 PM coolsoupy wrote:
> Uh - I can't work - how else do I get monthly checks besides dividends?
Coolsoupy,
I too am retired. If "dividends" mean the bulk of your life's capital is in equities, that's a lot of risk since you can't earn it again. Besides having dividend paying stocks or stock funds, there are municipals, particularly very safe tax free state bonds, several kinds of Treasury notes and bonds, and plain old FDIC insured CDs. You don't need a fund to own them and pay no commissions. Also, in recessions, not only does the stock price take a hit, but dividends can and will be cut. So just suggesting that diversification means divident paying stocks but a good percentage in other investments that just about insure your principal. JMHO.
1) If dividends are stopped, then they become retained earnings. How does that then negatively affect the stock price? The government has not taken the money away; it simply is rearranging access to it.
2) If dividends are taxed as ordinary income, companies will be less likely to pay dividends. Again, these will become retained earnings boosting the stock price. That boost in stock price will then be taxed as capital gains. Again, the same amount of money. You just get at it differently.
So how again does the stock price suffer?
The stock price would suffer, because (1) we are psychological machines, not computing machines -- fear and doubt would rise, and (2) those who bought because the need/want the cash flow would rotate out and it is not clear that others would necessarily rotate in.
Your argument is about the math equivalency of two states, which even if scientifically true, is not the way individuals and crowds think behave.
If the government said "no more dividends for bank stocks" for a while, their natural constituency for buying shares would diminish, and concern about what the government would do next would cause a level of uncertainty that is never good for prices.