Dividends Back in Vogue -30th March 2003

Jean Scheidnes - Reuters

NEW YORK (Reuters) - In the summer of 1984, a school nurse in Horsham, Pennsylvania bought 100 shares of Philip Morris for $6,438.

Several stock splits and 19 years later, she recoups almost all of her original investment annually in cash dividends paid by the company -- now called Altria Group Inc. MO.N

"For people who don't know much about stocks, which I didn't, my advice is to buy blue-chips and hold on," said Dorothy Cherney, 85, the now-retired nurse.

"Every stock that pays a dividend isn't going to move the way Philip Morris did in the 1980s. But it's a great illustration of the value in dividends," said her son, Paul Cherney, chief real-time market analyst at S&P Marketscope in New York.

Dividend stocks fell somewhat out of favor in the 1990s, the heyday of "growth stocks," but the conservative assets are once again on the minds of investors.

A potential dividend tax break is on the rocks with U.S. legislators, but institutional investors say the humble dividend remains a vital aspect of equities.

"In this market, the dividend component of total return is going to become more important. A 2 percent yield in a 25 percent return is not a lot, but 2 percent in an 8 percent return is substantial," said Tom Huber, portfolio manager for the T. Rowe Price Dividend Growth Fund.

Dividends are often a better vehicle for returning excess cash to shareholders than share buybacks, Huber said, because buybacks tend to occur at poor prices or simply offset option dilution, which does not benefit shareholders.

"In the event (the tax break) passes, no question, dividends will get a whole lot more attention from shareholders and management teams, and you'll see more companies paying dividends. There's a nice list of high-quality business that will start," Huber said.

PLAYING POLITICS

The U.S. Senate, facing record deficits and a costly war in Iraq, last Wednesday passed a budget for next year that includes less than half of the $726 billion in new tax cuts sought by President Bush, and leaves little room for eliminating taxes on dividends -- the centerpiece of Bush's economic plan.

Currently, dividends are taxed on both the corporate and investor level. Some analysts still believe the double taxation will eventually be eliminated.

"It's just a matter of time, because it makes sense from a corporate governance standpoint. You want to keep the transparency up by making companies give you cash. You can't manipulate cash like options," said James McGlynn, who runs a large-cap value portfolio for Summit Investment Partners.

There have been scattered trading rallies on news about the tax law changes that have subsequently been sold off, but nothing meaningful yet, fund managers said.

"Clearly, there are businesses with strong long-term outlooks and that could pay substantially more dividends in the future that have not yet rallied. Microsoft is a poster example," said Chris Bonavico, manager of the Transamerica Premier Aggressive Growth Fund.

Microsoft Corp. MSFT.O , the world's top software maker, declared its first-ever dividend in January.

Despite Dorothy Cherney's good fortunes with Philip Morris, Bonavico is less sanguine about tobacco stocks, long seen as safe havens of dividend income.

"The government, federal and state, are going after the cash flows of the tobacco industry. It's a huge political risk. As states' budget deficits balloon, this risk is rising," he said.

Another corporate giant that might be encouraged by a tax break is Pfizer Inc. PFE.N , according to Philip Dow, director of equity strategy at RBC Dain Rauscher.

The world's largest drugmaker has raised its dividend from 23 cents to 60 cents in five years but still has just a 1.9 percent yield, according to Dow.

A Dain Rauscher report recommends that equity portfolios include a greater share of dividend paying stocks, as dividends have historically contributed about 70 percent of total equity returns and have outperformed in both up and down markets.

And dividend stocks may become even more attractive as baby boomers seek retirement income.


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