NCPA - National Center for Policy Analysis

Would Dividend Tax Cuts Encourage More Companies to Issue Them?

January 8, 2003

If President Bush is successful in eliminating taxation of stock dividends at the personal level, companies which do not offer dividends now probably wouldn't rush to do so in the immediate future, analysts report. But that could change if investors begin punishing the stocks of the roughly one-third of big companies that do not pay dividends.

  • Officials at companies which do not pay dividends say they probably will continue to use their cash to make investments and buy back shares of stock.
  • Executives at companies that already pay dividends -- often in older industries -- seem more willing to step up their payouts in response to the tax change.
  • Some even predicted that technology companies would have no choice but to follow their lead once investors hungry for decent returns began reacting to large cash payments.
  • Financial experts point out many technology executives have been loath to turn cash over to their shareholders -- seeing that as an admission they do not have ideas for new investments that would make their companies more profitable.

Last year, with the market falling and many investors suddenly skeptical of corporate accounting, many dividend-paying companies stepped up their distributions. But even after the increases, the dividend yield -- dividends as a percentage of stock prices -- of the major companies in the S&P 500 stock index was only 1.83 percent. That was down from about 6 percent 30 years ago.

Source: David Leonhardt and Claudia H. Deutsch, "Few Officials at Companies See a Change on Dividends," New York Times, January 8, 2003.


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