The case for dividend-paying stocks
David Rosenberg has several good observations in his Daily Commentary (as he does everyday). Like him I think the market is overextended here. (And no, I am not calling for 'the top' just a correction and I do think we will see higher SPX prices next year). But his thoughts on dividends are especially good.
THE CASE FOR DIVIDEND-PAYING STOCKS
Despite all the noise that the Democratic left is making (especially about the estate tax provision), the tax bill is going to pass in both the House and the Senate very soon.
Whether or not this stimulus is going to ignite the consumer remains to be seen — the tax rebates of 2001 and 2008 serve as reminders that temporary “fiscal goodies” exert a limited impact on spending behaviour. In both periods, the personal savings rate jumped and upwardly revised consensus economic forecasts proved to be overly optimistic.
That said, there is a tangible positive effect here from the tax bill that deserves mention and pertains specifically to dividends.
Under the deal, the top tax rate on dividends will stay at 15%. Had the Bush tax cuts not been extended, high-income earners would have been hit with as much as a 40% tax.
According to S&P, the two-year extension will add an incremental $75 billion into the hands of individual investors and these dividends are typically re-invested.
What is interesting was that in the months prior to the tax deal being struck between the White House and the GOP leadership, income/dividend ETFs saw a noticeable deceleration in net inflows — to $698 million in November from $1.7 billion in both September and October. Look for a rebound now that the tax deal has been reached.
Not only that, but at the margin, company boards may have been hesitant to announce a dividend hike in recent months. In fact, the prospect of higher tax rates attached to dividends very likely caused a shift in strategy for more buybacks. We may start to see a reversal since the boards now should have a higher comfort level to pay out dividends and see their stock price be rewarded for the action. Particularly if most of the spasm in the bond market is behind us, one would have to think that a focus on dividend growth/yield is going to have some payoff with the taxation uncertainty put to bed. Also keep in mind that the U.S. nonfarm nonfinancial corporate sector is sitting on $1.93 trillion of cash/equivalents, which is at a 51-year high representing 7.4% share of total assets (and $243 billion higher than a year ago).