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Higher Dividends Should Make For A Good Season

- Alan Lavine and Gail Liberman

Good news. Corporations are raising their dividends this year. That means you can indulge in the finer things in life a bit more this season knowing that you should be getting more income. And if you choose instead to reinvest at least some of those proceeds in new shares of stock, you should reap higher total returns on your investments to boot. Total return is dividend or interest income plus the percentage gain or loss in the price of a security.

One-hundred-and-ninety-nine companies that make up the S&P 500 stock index have raised dividend payments this year or started paying them in the first nine months of this year, according to T. Rowe Price. The S&P 500 is an index of the 500 large stocks traded on the New York Stock Exchange. The average dividend increased 20 percent, according to Standard & Poor's.

It's not surprising that companies are raising their dividends on corporate profits that are passed on to shareholders. Uncle Sam, in his infinite wisdom, slashed the income tax rate on dividends to 15 percent. Dividends formerly were taxed based on your ordinary income tax bracket. So in the past, Uncle Sam could have soaked you for as much as 39.6 percent of your dividends!

"Corporations are clearly responding," says Stephen Boesel, manager of the T. Rowe Price Capital Appreciation Fund. "It's not just a coincidence. I think we will see yield oriented (stock) strategy prove rewarding in terms of income and capital appreciation."

Here are several blue-chip companies that have dramatically increased their dividend payments, according to T. Rowe Price.

  • Goldman Sachs increased dividend payments 108 percent.

  • Maxim Integrated Products increased dividend payments 100 percent.

  • Citigroup raised dividend payments 75 percent.

  • MacDonald's Corp. increased dividend payments 70 percent.

  • Colgate-Palmolive increased dividend payments 33 percent.

  • Lehman Brothers Holdings increased dividend payments 33 percent.

  • American Express increased dividend payments 25 percent.

  • Lowe's Companies increased dividend payments 25 percent.

  • Wal-Mart Stores increased dividend payments 20 percent.

  • Johnson & Johnson increased dividend payments 17 percent.

If you are reinvesting your dividend income, you also can expect to gain, the report says. Thomas Huber, manager of the company's Dividend Growth Fund, expects stocks to grow at an 8 percent to 10 percent annual return over the longer term.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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