Bush offers oomph to swinging pendulum
By Dean Calbreath, UNION-TRIBUNE STAFF WRITER
January 8, 2003
signonsandiego.com
Associated Press
Long before President Bush latched onto them, dividend-bearing stocks have been attracting investors – the slow but steady tortoises that often outpaced the trendy hares on Wall Street.
Long before President Bush latched onto them, dividend-bearing stocks have been attracting investors – the slow but steady tortoises that often outpaced the trendy hares on Wall Street.
They fell out of favor in the mid-1990s, as speculators chased the dot-com dream. But once the market crashed, chastened investors began returning to the slower-growing but more reliable dividend shares.
Between 2000 and 2002, as investors began to return, the share price of the 351 dividend-paying companies in the Standard & Poor's 500 index rose an average of 0.8 percent, while the overall index fell 40 percent.
"It's the swing of the pendulum, and it's been happening for a while," said Bob Benson, a senior market analyst for Banc of America Securities. "If you're not optimistic about future growth, particularly in such areas as telecom and technology, then you seek the safety of dividends."
The White House hopes the pendulum will get an added push from President Bush's proposal to eliminate the tax on dividends, but the move does have a price.
It will cost the U.S. Treasury more than $300 billion in the next 10 years. Moreover, it will only benefit the 8 percent of the American public that now pays the dividend tax.
More than 40 percent of the benefit from cutting the tax would go to the wealthiest 1 percent of taxpayers, while 70 percent would go to the top 5 percent, according to a recent study by The Urban-Brooking Tax Policy Center.
"A little over 40 percent of the dividend tax benefit would go to the elderly, who like the steady income that dividends provide," said Robert McIntyre, director of Citizens for Tax Justice in Washington, D.C. "But more than half of that amount would go to elderly people making over $200,000 per year."
The Bush proposal is meant to encourage companies to earmark more of their profits for dividends. But it is not clear whether it will have its desired effect.
A handful of well-funded high-tech companies – notably Oracle and Dell – said they would consider issuing dividends after yesterday's announcement. But an even larger number declined – including Microsoft, Starbucks and Cisco Systems – saying that their profits could be better spent on expansion plans.
"We have no plans at the present time to pay a dividend, but we will watch the proposed tax changes with much interest," said Richard Grannis, treasurer of Qualcomm Corp.
Market watchers note that dividend payouts are no guarantee of safety or corporate growth. A number of price-battered companies issue dividends, including Duke Energy, Verizon and SBC Communications.
"The dangerous thing is that some high-yielding stocks right now are paying out dividends higher than their earnings," said John Riley, head of Cornerstone Investments in Rhode Island. "Haven't we learned anything from the 1990s?"
And an emphasis on dividends will not necessarily revive the stock market.
"Dividends can offer you some downside protection against market downturns," said James Welsh, who runs Welsh Money Management in Carlsbad. "But the bigger issue is that we're still in a bear market, with an oversupply of goods in the marketplace and not enough demand. Dividends won't change that."
Shares of many dividend-producing companies actually dropped yesterday, for fear that the Bush tax cut would decrease their attractiveness to investors by increasing the competition.
Real estate investment trusts, or REITs, which are required by law to earmark 90 percent of their profits to dividends, fell an average of 1.5 percent yesterday. That was the biggest decline in 11 weeks as measured by the Morgan Stanley REIT index. Analysts predict the index could drop 5 or 6 percent more, sparked by investor fears that Bush's proposal could make other dividend-paying companies more attractive.
Despite the decline, Tom Lewis, chief executive at Realty Income of Escondido, a local REIT, said he thought the Bush proposal was "great."
"It would reward companies to pay cash to investors, and in the age of Enron, companies that pay dividends have to pay with cash, so it generally leads to more conservative accounting," said Lewis, whose company's stock slid 2.8 percent yesterday.
Lewis said the Bush proposal may pressure companies to pump more money into dividends instead of risky investment vehicles. "Historically, management's done a pretty lousy job of investing capital," he said.
But Stuart Tanz, chairman of Pan Pacific Retail Properties, a REIT in Vista, said investors may not see any noticeable changes, although he added that it could inspire some REITs to change their structure into taxable corporations.
Pan Pacific stock dropped 1 percent yesterday, despite its announcement that it was boosting its quarterly dividend more than 5 percent to 50 cents per share.
Utilities have been another area known for producing dividends. Shares of Sempra Energy slid more than 3 percent yesterday after Bush's announcement. But Sempra officials say the proposal could help eventually boost their company's stock price by several dollars a share.
Stephen Baum, Sempra's chairman and chief executive, said the dividend cut could help stir more interest in Sempra stock. The resulting capital could help the company achieve permanent financing for its power plants and pick up some assets from distressed competitors.
"We have no present intention of increasing our dividend, although should the tax plan go through, every company – including ours – will look at the issue," he said.
Staff Writer Mike Freeman contributed to this report.
Dean Calbreath: (619) 293-1891; dean.calbreath@uniontrib.com |
