Saturday, July 08, 2000

Personal Finance

Dividends dying out of market

        Dividends are dead. Capital gains rule.

        That's what appears to be happening, as another 46 percent of publicly traded U.S. corporations have stopped issuing the quarterly payments since 1978.

        “There's been a trend in the market toward growth vs. dividends,” said Kevin McNamara, president of Chemed Corp. “Dividends are increasingly out of favor.”

        Are they ever — much to the chagrin of shareholders who count on the regular income, especially from once high-yielding stocks like Chemed. But, following this trend, the parent of Roto—Rooter and other service companies cut its high-yield dividend last fall to a much smaller payout.

Growth favored
        At least Chemed still pays a dividend. In announcing its merger and transformation into Broadwing Inc. last year, the then-Cincinnati Bell said it was discontinuing its dividends all together. Its spinoff, Convergys Corp., has never paid a dividend.

        They are far from alone. Some 79.3 percent of all publicly traded companies don't pay dividends, according to a recent Barron's article. That's up from 33.5 percent in 1978.

        The apparent reason: During the raging bull market of the 1980s and 1990s, investors favored growth and capital appreciation more than steady income. Indeed, Broadwing spokeswoman Libby Korosec said the elimination of its dividend helps the company fuel such growth.

        “Growth, in turn, is returned to our shareholders in the form of appreciated stock, which in the long run we expect will yield superior shareholder value,” she said.

Tax factor
        Another thing pushing dividends off the cliff: tax law.

        Dividends are treated and taxed as ordinary income, where rates can reach 39.6 percent. But if that money is used for an expansion or a stock buyback that drives the stock price up, then the ensuing long-term gain is taxable at no more than 20 percent.

        “Tax laws benefit these types of companies not having dividends today,” said Rob Bult, financial planner and accountant at Fitzgerald Lame Torbeck Group/J.C. Bradford & Co.

        But that's not the easiest to swallow when you're on a fixed income and relying on regular dividend payments. Dividends, after all, are more stable than swings in stock prices.

        If you're among those that would rather have dividends than capital gains, sell the nondividend-paying stock and put your money into a company that is paying. Mr. McNamara said his company still is going through a shareholder rotation between the yield-seekers and the growth-seekers.

        Mr. Bult said it's often a matter of asset allocation. “It really comes down to if you're relying on dividends for spending money, it could be harmful,” he said. “For the majority of investors, it's not harmful.”

        Amy Higgins writes about personal finance for The Enquirer. You can reach her at (513) 768-8373;; or Your Money, The Cincinnati Enquirer, 312 Elm St., Cincinnati 45202.


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