In a recent study by Boston-based investment manager Eaton Vance, senior finance executives at American companies that pay dividends agreed that dividend-paying stocks are becoming more popular. The long-term growth of dividends was also predicted by the executives who took part in the nationwide survey.
Penn, Schoen & Berland Associates, Inc. did a survey, and 47 percent of finance executives said they think dividend growth will continue to outpace earnings growth in 2006. Standard & Poor's did some research and found that dividends grew faster than corporate earnings over the past year. These predictions are in line with what they found. Eaton Vance's executive vice president and chief equity investment officer, Duncan Richardson, said, "With strong balance sheets and cash flows, American companies have the means and motivation to keep raising dividends."
How long do you think this trend will last? 60 percent of executives who think dividends will continue to grow faster than earnings think this trend will last for one to two years. Another 25% think that this trend will last for up to five years. But how long this trend lasts may depend on whether or not Congress keeps the lower tax rate on dividends. Mr. Richardson says, "Businesses might not be able to keep raising dividends if the tax cut extensions don't happen and dividends are taxed at a higher rate again."
No matter what happens with the possible extension of current tax act provisions, Mr. Richardson said, "the important takeaway is that companies are giving investors more money back in the form of dividends." As many dividend-paying companies use extra cash to raise dividends, six out of seven finance executives polled said that a company's history of increasing annual dividends is a sign that it cares about its shareholders. Also, four out of five believe that a company's dividend growth rate can give investors confidence in the company's expected long-term growth potential.
In Eaton Vance's sixth annual survey of investors, which was done last year, investors agreed with these ideas. 78 percent of the investors polled had a very positive view of companies that pay dividends. They saw dividends as a sign of financial strength and a reliable source of cash.
Mr. Richardson said, "There has been a big change in the way investors think about investing, from focusing on growth to focusing on value in a more conservative way." "In the 1990s, investors were more interested in buybacks than dividends because buybacks increased reported earnings per share. According to the Eaton Vance study, most individual investors (57%) now say they prefer regular quarterly dividends over stock buybacks (23%) or special dividends (8 percent).
Mr. Richardson says, "Dividends are back in style, and value investing has gotten out of the doghouse."
Eaton Vance Corp. is an investment management company based in Boston. Its stock trades on the New York Stock Exchange with the symbol EV. As of January 31, 2006, Eaton Vance and its affiliates were in charge of more than $113.3 billion in assets for more than 100 investment companies and individuals and institutions, such as corporations, hospitals, retirement plans, universities, foundations, and trusts.
Penn, Schoen & Berland Associates, Inc. is a full-service polling and market research firm based in Washington, D.C.
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