Monday's stocks fall against backdrop of stable dividends

There's nothing like a good shock to the stock market to make long-term investors refresh their commitment to quality holdings.

Monday's drop in the Dow Jones industrial average of nearly 2 percent – with corresponding declines in the Nasdaq composite index and S&P 500 stock index – represented the biggest one-day drop since November.

In the midst of the sell-off came a little noticed announcement from blue chip giant, Procter& Gamble. The maker of Tide detergent, Duracell batteries, Head & Shoulders shampoo, Gillette razors and several other billion-dollar brands, announced it was raising its quarterly dividend by 7 percent.

Of note in the announcement was a statement saying the increase marked 57 years in a row it has raised the payout to shareholders, a trend of increasing importance.

“Dividend yields remain relatively attractive compared to other investments such as corporate bonds, Treasurys and bank CDs, especially considering the new 'permanent' tax rate, which, while higher than last year, maintains preferential treatment for dividends,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Silverblatt was referencing the uncertainty about the tax treatment of dividends leading up to the fiscal cliff. Since 2003, qualified dividends had been subject to a maximum tax rate of 15 percent. Had Congress not acted, dividend payments would have been taxed as ordinary income, for most people a much higher rate.

However, the Taxpayer Relief Act approved shortly after the first of the year, locked in the maximum tax rate on dividends at 20 percent.

At the end of the first quarter of 2013, the dividend yield on the S&P 500 was 2.61 percent, up slightly from the rate of 2.58 percent during the same period a year ago.

Currently 80 percent of the companies in the S&P 500 pay a dividend to shareholders. However, the payout ratio — the portion of earnings per share paid to investor as dividends — sits at the lowest rate since the mid-1930s. S&P calculates the current payout rate of 36 percent is well below the historic rate of 52 percent, suggesting there is plenty of room for more companies to increase their distributions to shareholders.

Like Procter & Gamble, companies that raise their dividends on a continuous basis have become a magnet for investors looking for income and growth.

“U.S. dividend growers are typically established blue-chip companies — companies with stable business models, strong balance sheets and management teams committed to shareholders — that have been able to grow their earnings in most market environments,” cites a report from investment firm, Lord Abbett.

To be sure, the actions by the Federal Reserve to keep short-term interest rates near zero have made dividend-paying stocks especially attractive. Should the Fed change policy and let interest rates rise on other investments, perhaps creating competition for these companies. However, most observers believe such action by the Fed is well into the future.

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