Cliff behind us, dividend-paying stocks attractive again

For most investors who collect and benefit from dividend-paying stocks, the fiscal cliff turned out to be a non-event.

Congress and the Obama administration approved a plan to keep the preferential tax rate on qualified dividends at 15 percent for households earning less than $450,000 and individuals with taxable incomes of under $400,000.

For those over the limit the rate jumps to 20 percent, still below the tax rate on ordinary income.

This news enhances the attraction of companies paying and increasing distributions to shareholders.

“I’d note that paying and consistently raising dividends is a sign of sound corporate governance and management’s confidence in a company’s business prospects," said Judith Saryan, portfolio manager at Eaton Vance Management. "In my view, launching or increasing dividend payouts is often a better use of a company’s capital than, say, buying back stock from shareholders or engaging in acquisitions.”

The uncertainty about the tax treatment of dividends caused many companies to pay special dividends at the end of 2012 and pay forward distributions due early this year.

But, that didn’t keep them from using a portion of the estimated $2 trillion in corporate cash to continue raising dividends in 2013.

And Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, says there is plenty of room for more growth.

“Payout rates, which historically average 52 percent, remain near their lows at 36 percent," Silverblatt said. "At this point, even with many January payments paid in December, we should see 2013 as setting another record for regular cash distributions.”

Out of the universe of some 10,000 publicly traded U.S. companies, 2,833 raised their dividends in 2012, compared to 1,953 in the previous year, he said.

In addition, the average dividend yield of 2.80 percent, Silverblatt said, “is relatively high when compared to competing income producers such as corporate bonds, treasuries, or bank CDs.”

And in a time of steady but potentially rising inflation, many companies are hiking their dividends at a rate faster than the cost of living.

For instance, Boeing announced a 10 percent increase in the company’s quarterly dividend to 48.5 cents per share, generating a current yield of 2.6 percent.

“As returns accelerate on the investments we made in innovative new products, we plan to continue our balanced cash deployment strategy, increasing returns to shareholders, investing in our core businesses and our workforce, and maintaining a strong balance sheet with healthy credit ratings,” said CEO Jim McNerney.

Of course, companies paying dividends are not without risk. After all, they are publicly traded companies and can be at risk of the typical swings in stock prices.

Such popular dividend-paying companies as McDonald’s and Walmart saw their share price decline in 2012 even though they have consistently raised the payout to investors.

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