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Bob Carey
Chief Market Strategist
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  Companies Have Plenty Of Room To Boost Dividends
Posted Under: Stock Dividends
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Past Performance is no guarantee of future results.

View from the Observation Deck

  1. The S&P 500 posted a total return of 76% from 3/9/09-9/30/11.
  2. Constituents in the S&P 500 have been raising their dividend distributions just enough to keep their yields from falling.
  3. Currently, payout rates, which on a historical basis have averaged 52%, remain near their lows at less than 30%. (S&P)
  4. This indicates that companies are distributing about 30¢ of every dollar of earnings in the form of a dividend, rather than the 52¢ they used to.
  5. As the chart shows, the dividend yield on the index started to plunge back in the 1990s. The decline in yields was largely induced by tax policy, in our opinion.
  6. Investors paid a 20% rate on long-term capital gains in the second half of the 1990s, while paying their ordinary income tax rate on stock dividends.
  7. Companies adopted growth-oriented strategies to attract investors knowing they would be sensitive to the disparity in tax rates.
  8. The yield on the S&P 500 was nearly 4% in 1990, but has leveled at 2% since 2001. The only exception was in 2008, where the yield spiked when stock prices plunged.  
  9. We believe investors could be rewarded with higher dividends in the years ahead. The disparity between the index's low yield and strong earnings is too great.
  10. Don't be surprised to see greater shareholder activism on this issue.
Posted on Friday, October 7, 2011 @ 1:09 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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