Changing Tax Rates And Dividend Paying Stock Performance

With the looming fiscal cliff facing investors at the start of 2013, the marginal tax rate on dividends would increase to as high as 43.4% versus the current 15% rate. Investors are asking if this substantial increase will negatively impact the performance of dividend paying stocks. Copeland Capital Management recently published a white paper analyzing the impact of changing tax rates and the performance of dividend paying stocks vis-à-vis the overall market. The firm's research concluded:

• The performance of dividend-oriented strategies...did not demonstrate any significant relationship with tax rates during years when significant changes were enacted.

•  Corporate dividend policies also showed no relationship with changes in tax rates.

•  The performance of dividend growth stocks appears to be more closely linked with the economic cycle than either absolute tax rates or changes in tax rates.

The below tables detail the calendar year returns during changing tax rate environments. In the second table, as tax rates declined from 2002 to 2003, the market actually outperformed the payers and growers. The research paper notes market upturns following economic downturns generally favor lower quality names as the economy begins to improve. In short, tax rates had less of an impact than the economic cycle itself.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Source

Copeland White paper I: Dividends and Tax Rates (PDF)
By: David McGonigle
Copeland Capital Management
June 30, 2012
http://www.copelandcapital.com/PDF/Copeland_White_Paper_I_Dividends_and_Tax_Rates.pdf

H/T:  Advisor Perspectives

Dividend Payers In S&P 500 Index Continue To Grow

Howard Silverblatt, Senior Index Analyst for S&P Dow Jones Indices, recently noted the number of dividend payers in the S&P 500 Index has grown to 402 companies. This number reaches a level last seen in 1999. For 2012, thirteen companies have initiated dividend payments to date.

From The Blog of HORAN Capital Advisors

According to Silverblatt the dollar dividend payment for S&P 500 companies is up 14.7% so far this year. Additionally, he notes, "We expect a record $275 billion in S&P 500 dividends for 2012, up from $241 billion in 2010. The former record was $248 billion in 2008." Lastly, S&P notes, "since 1926, reinvested dividends have accounted for about 41% of the total return of the S&P 500 Index." Certainly, dividends are an important factor for investors to consider when evaluating investment choices.

With the approaching fiscal cliff at the end of the year, which includes the expiration of the current tax policy put in place during the Bush administration, companies may begin paying special dividends prior to year end. The reason for this is the fact the tax rate on dividends is scheduled to increase from 15% to a rate equal to a tax payers ordinary income tax rate.

Trahan: Equity Markets Mid-Way Through Melt Up

Francois Trahan recently spoke with Consuelo Mack on WealthTrack and stated his belief the equity market is mid-way through a melt up. He believes this could last through the end of the year and possibly into the first quarter of 2013. He believes cyclically oriented stocks like industrials and materials, as well as higher beta equities, will be the better investments during this melt up. He believes the S&P 500 Index could reach a high of 1,550. He does believe the market continues to be a secular bear one; however, he does believe we are in the midst of another cyclical bull. He notes in the past 20-years, there were four 50%+ moves in the Japanese market and our low inflation environment is not too different from theirs. In short, he believes buy and hold is dead for the foreseeable future.

From a fundamental perspective he notes several of the cyclical components of the Index of Leading Economic Indicators have turned higher: interest rate spread, average weekly manufacturing hours, and manufacturers’ new orders for consumer goods and materials. Housing continues to improve as housing affordability is at a record high. Also, investors will be drawn out of fixed investments as their low sentiment about equities will provide a tailwind for a short term equity melt up. No doubt, investors continue to allocate investment funds to fixed investments as they are in a "risk off" mindset.

Although Trahan does not provide specific stock ideas in the interview, he does state investors should focus their equity investments on dividend paying stocks. Over 60% of S&P 500 companies have a dividend yield greater than the 10-year U.S. Treasury bond.

Investor Cash Sits In Bond Funds?

In spite of the low interest rate environment, investors continue to be attracted to bond funds. As the below chart shows, fixed income mutual funds continue to attract investors' funds. However, this flow of funds into fixed investments is not inhibiting the rise in the U.S. the equity market though.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

 

Given the low level of cash in money market mutual funds as a percentage of all mutual fund assets it may be that investors have parked their cash funds into bond mutual funds. If/when investors do decide to allocate more funds to equities, fixed income investors may be in for a rude awakening. "Buyer beware" for fixed investors seems an appropriate caution in this environment. Historically, strong flows into fixed mutual funds have not coincided with a rise in the equity market. Something appears as though it needs to give.

From The Blog of HORAN Capital Advisors

Individual investor bullish sentiment as reported by the American Association of Individual Investors did see a rise in bullish sentiment this week. Bullish sentiment rose six percentage points to 36.47% versus 30.45% in the prior week. Additionally, the bull/bear spread flipped from a negative 4.48 to a positive 9.12. The six week moving average remains near a low 30, however, the trend is beginning to indicate a turn higher. Are individual investors being coaxed off the sidelines?

From The Blog of HORAN Capital Advisors

Employment Growth Simply Too Low

Friday's employment situation report by the Bureau of Labor Statistics indicated employment grew by 163,000 jobs in July. No matter how one spins this number, the rate of growth is indicative of an economy that is growing too slowly. The seasonal adjustment actually accounted for 377,000 jobs. The magnitude of this adjustment is not uncommon for the month of July though. What will be interesting is the jobs number in September as the seasonal adjustments in the last few months of the year are historically largely negative.

From The Blog of HORAN Capital Advisors

At this rate of growth, it will take more than two years to get to an employment level reached prior to the '08-'09 downturn and this is not accounting for new entrants (college graduates) into the labor force.

From The Blog of HORAN Capital Advisors

The Friday release also noted that July's unemployment rate rose to 8.3% versus 8.2% in the prior month. The U-6 rate, includes marginally attached workers, rose to 15% and the participation rate declined to 63.7% versus 63.8% in June.

From The Blog of HORAN Capital Advisors

A disappointing jobs report no matter how it gets spun.