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The Great Rate Debate

Last year, some 1,949 companies increased their dividend payment. But will the trend continue if Congress opts not to renew the current rate?

16Mar

General Motors notwithstanding, companies have been eager to issue or increase their dividends ever since the federal tax rate on them was lowered to 15 percent. Last year, some 1,949 companies increased their payment, according to Standard & Poor's. But will the trend continue if Congress opts not to renew the current rate?

There's no question where finance executives stand on the issue. A recent survey by Eaton Vance Corp. found that three out of four CFOs want the dividend tax rate to be extended past its December 31, 2008, expiration date. The same survey found that 43 percent of finance executives of dividend-paying companies believe if the Tax Act of 2003, which reduced the tax rate on dividends and capital gains from 35 percent to 15 percent, is not renewed, the economy will be severely affected.

"Dividends are a sign of good corporate governance and company strength," says Duncan W. Richardson, chief equity investment officer at Eaton Vance. Any tinkering with the rate, say Robert Willens, a tax and accounting analyst at Lehman Brothers, would not only be a "real blow to the economy," but would cause the current trend of companies offering higher and more-frequent dividends to "shrivel up."

Since the tax rate was lowered, companies have taken full advantage. According to Standard & Poor's, 63 percent of the S&P 500 increased or initiated dividend payments in 2005. Some of those increases, says Richardson, topped 100 percent. Citicorp, for instance, paid 20 cents per share in 2002 and now pays 49 cents per share. Eaton Vance paid 4 cents in 2002 and 10 cents in 2005. GM was one of only 11 companies to cut their dividend.

Democrats and Republicans have yet to find common ground on the matter. Part of the problem is that extending the rate even for a year will cost $10 billion. Yet Scott Hodge, president of the Tax Foundation, believes, "Congress will get around to extending the rate even if Republicans have to bribe Democrats to agree by making a few concessions. They know the markets will tumble if it's not renewed."

At press time, both the Senate and the House were reviewing dividend legislation. Meanwhile, companies were showing their own brand of optimism: some 54 companies had announced dividend increases by mid-February.

Among finance executives of dividend-paying companies...

75% think the President's dividend rates should be renewed

44% think Congress will make the cuts permanent

43% believe a failure to extend cuts would negatively affect the economy

Source: Eaton Vance Corp.

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