Why investors yawn as dividends dry up

For now, the dividend may be going the way of the horse and buggy - headed toward obsolescence.

For some mutual-fund investors - not to mention buyers of individual stocks - that may be sad news.

Dividends - regular cash payments to shareholders - once represented a primary rationale for buying into the turbulent stock market.

Stock markets could act like a roller coaster, but the regular quarterly dividend payout represented a sign of stability and guaranteed income for investors.

They represented a company's way of giving shareholders an immediate and tangible reward for buying its stock.

Not only were dividend-paying companies considered the stable firms of American industry, but the dividends themselves represented a major part of total stock-market returns. Right up into to the 1980s, dividend yields (the annual dividend amount divided by share price) often ranged between 4 percent and 6 percent. In some years, dividends accounted for, on average, a third to a half of the stock market's total return. (Total return has averaged around 11 percent since the 1930s.)

But today - operating on the theory that they can do more for long-term investors by using profits to improve company performance - more companies are ceasing to pay dividends, says Joseph Tigue, managing editor of "The Outlook," a financial review published by Standard & Poor's Corporation.

Case in point: In June, only 86 companies offered dividends, compared with 113 in June of 1999, says Mr. Tigue. For the first half of this year, 867 public corporations paid dividends, compared to 982 in the same period last year.

It's not that companies have reduced the amount of their dividend payout, says Tigue. Rather, they have simply elected not to pay dividends at all.

The exact cause of this shift is unclear. Reasons suggested by experts include:

*The soaring share prices of technology firms. Companies including Microsoft, Intel, and Cisco have traditionally not paid dividends.

*Stock buybacks. Rather than pay dividends, corporations are more likely to use the money to buy back company stock and boost share value.

*The red-hot acquisition market of the 1980s and '90s. If a company is buying out other firms, it's cheaper to use internal cash holdings than to go out and borrow millions of dollars.

Currently, the dividend yield on the S&P 500 is 1.1 percent, an historic low, says Tigue. It is also a statistic that makes market experts nervous, since the yield has seldom dropped below the more-normal 3 percent range.

Usually the yield falls below this level just before major market downturns, such as in 1968, 1972, and 1987.

For mutual-fund holders the shift away from dividends proves both challenging and irrelevant, Tigue says. Irrelevant in the sense that most fund investors probably don't care if their funds pay out dividends.

And challenging if you are a fund-holder who actually likes dividends.

"Finding funds that pay dividends is no longer easy," says Lawrence Solomon, who heads up statistical research for the No-Load Fund Investor, a newsletter in Irvington-On-Hudson, N.Y.

With the exception of a few growth-and-income (G&I) funds, or balanced funds, few funds offer them, says Mr. Solomon.

That is not entirely accidental, he says. Dividends are taxed as ordinary income, payable annually, he notes. So fund investors in upper-income brackets would rather forgo dividends and instead seek capital appreciation - taxed at lower capital-gains rates.

Moreover, investors in sheltered retirement accounts such as IRAs and 401(k) plans tend to be indifferent to dividends, since they don't have to pay annual taxes on returns, Solomon notes.

According to financial research firm Morningstar Inc. in Chicago, only about 4 percent of stock funds now pay out a dividend yield of more than 2 percent.

Most fund investors seeking current income - that is, dividend payments - tend to be retirees, say experts. The problem is that many G&I funds that offer dividends tend to garner low performance scores for total fund return.

The stock fund with the highest dividend yield in Solomon's data base, for example, is the Greenspring Fund. It has a dividend yield of 6.9 percent. Unfortunately, its 3 year total return has been "about zero," says Solomon. For the past 12 months, it was up a little more than 3 percent at a time when many funds were well into double-digit territory.

What's happening, says Solomon, is that by design, G&I funds include stocks of companies that pay dividends. But these businesses are either in low-growth, non-high-tech industries, or out of favor with Wall Street. Simply put, the inclusion of such firms lowers the total return of the fund.

(c) Copyright 2000. The Christian Science Publishing Society