For all the rush to issue dividends in the fourth quarter, ahead of an expected tax increase in the New Year, U.S. companies still look more keen to hug their cash than distribute it to investors.
According to Howard Silverblatt, senior index analyst at Standard & Poor's, the payout rate among U.S. dividend payers is just 36 per cent – near its low point and still well below the historical average of 52 per cent. The rate compares dividend payouts with income.
To be sure, this low payout reflects a conservative economic outlook on the part of corporate America, rather than companies ignoring the demands of investors.
And it comes as something of a surprise, given that companies have been more than eager to raise their dividends and distribute them earlier than expected to put investors ahead of a tax increase by Washington.
In the fourth quarter, 1,262 companies increased their dividends, up an astounding 94.5 per cent from the number of dividend increases in the fourth quarter of 2011. And dividend "extras" – payments above and beyond the regular ones – numbered 483 in December alone, or three times the number issued in December 2011.
The apparent generosity followed tremendous uncertainty in 2012 over where U.S. dividend taxes were headed. As Washington negotiated to avert the so-called "fiscal cliff" of automatic tax increases and spending cuts, investors were facing the prospect of seeing dividend taxes tripling from the decade-long rate of just 15 per cent: Going over the cliff would mean dividends taxed as ordinary income. Many companies decided to hedge their bets and boost payouts before the January increases kicked in.
With the New Year's Day budget agreement, though, most fears were put to rest: The dividend tax rate remains unchanged for individuals earning less than $400,000 (U.S.) a year. It rises to 20 per cent, up just five percentage points, for anyone earning more than that.
For dividend investors looking ahead, then, the tax increases might be a relatively small factor weighing on dividend increases in 2013.
"At this point, the economy remains our highest concern, with the higher dividend tax rate having some negative impact, but relatively minor," Mr. Silverblatt said.
David Berman