NEW YORK (Reuters) - Lower dividend taxes have made shares of companies that pay a portion of their profits to shareholders more attractive -- something likely to improve in the near term, say some of Wall Street's leading lights.
The lower tax is also prompting more companies, some that historically have shunned the practice, to announce they will pay quarterly dividends.
Last week, Mandalay Resort Group became the first major casino operator to announce it would pay a dividend, sending the stock up 11 percent.
"Dividend payers have been feeling the love from the fund community," said Barry Ritholtz, market strategist at Maxim Group, which oversees $5 billion. "Credit the new tax laws for the newfound affection for dividend-paying companies."
Though the law signed by President Bush in May was less than half of the total tax reduction he wanted, it lowers the top tax rate on dividends and capital gains to 15 percent through 2008.
William Alexander, a strategist with Citigroup private bank said in a research note he expects more companies to pay out a share of their profits, and those that do already to pay more.
He said the dividend yield on the Standard & Poor's 500 index could rise from its current level of 1.7 percent to between 3 percent and 3.5 percent, as current share repurchase plans are replaced with higher dividends.
BEST IN SHOW
Some 71 percent of the S&P 500 companies pay a dividend, versus 50 percent in the S&P MidCap 400 and only 40 percent in the SmallCap 600, said Sam Stovall, chief investment strategist at Standard & Poor's, in a research note.
"As a result, yield-hungry investors are more likely to be attracted to large-cap issues than to mid- and small-cap stocks," Stovall said.
Delving into sector choices, Stovall said the utilities and materials sectors consistently offer the highest yields.
Telecommunications stocks, such as the Baby Bell regional phone companies, offer high yield in the large-cap arena while financial companies pay solid dividends in the mid- and small-cap sectors.
Low yielding sectors include consumer discretionary, health care and information technology.
Like gaming companies, tech may see higher dividends. The S&P Information Technology sector now offers a yield of only 0.33 percent, the lowest of all 10 sectors.
Talk of tax changes earlier this year was followed by Microsoft Corp.'s first-ever dividend announcement in January, while wireless technology company Qualcomm Inc. announced in February it too would pay a dividend for the first time.
WHITHER REITS?
Though real estate investment trusts (REITs) actually offer the highest yield, 6.9 percent, of the S&P sub-industries, they are not expected to benefit from lower taxes, Stovall said.
Stovall warned against buying a stock based solely on the dividend.
S&P has more than 60 companies that offer dividend yields in excess of 2.5 percent that carry "avoid" or "sell" ratings, including Eastman Kodak, rated "sell" despite a 5.9 percent yield, and Genuine Parts, also rated "sell" though it has 3.5 percent yield.
"The initial effect is to raise stock prices, but that should be a one-time gain unless dividends grow," said Milton Ezrati, senior economist and strategist, Lord Abbett & Co. which oversees $57 billion.
And while Richard Bernstein, Merrill Lynch & Co.'s equity strategist, recommends over-weighting high dividend yield stocks, he also noted that nondividend-paying companies in the S&P 500 have seen their stocks outperform those of dividend paying companies by 2,000 basis points this year.
The lower tax is also prompting more companies, some that historically have shunned the practice, to announce they will pay quarterly dividends.
Last week, Mandalay Resort Group became the first major casino operator to announce it would pay a dividend, sending the stock up 11 percent.
"Dividend payers have been feeling the love from the fund community," said Barry Ritholtz, market strategist at Maxim Group, which oversees $5 billion. "Credit the new tax laws for the newfound affection for dividend-paying companies."
Though the law signed by President Bush in May was less than half of the total tax reduction he wanted, it lowers the top tax rate on dividends and capital gains to 15 percent through 2008.
William Alexander, a strategist with Citigroup private bank said in a research note he expects more companies to pay out a share of their profits, and those that do already to pay more.
He said the dividend yield on the Standard & Poor's 500 index could rise from its current level of 1.7 percent to between 3 percent and 3.5 percent, as current share repurchase plans are replaced with higher dividends.
BEST IN SHOW
Some 71 percent of the S&P 500 companies pay a dividend, versus 50 percent in the S&P MidCap 400 and only 40 percent in the SmallCap 600, said Sam Stovall, chief investment strategist at Standard & Poor's, in a research note.
"As a result, yield-hungry investors are more likely to be attracted to large-cap issues than to mid- and small-cap stocks," Stovall said.
Delving into sector choices, Stovall said the utilities and materials sectors consistently offer the highest yields.
Telecommunications stocks, such as the Baby Bell regional phone companies, offer high yield in the large-cap arena while financial companies pay solid dividends in the mid- and small-cap sectors.
Low yielding sectors include consumer discretionary, health care and information technology.
Like gaming companies, tech may see higher dividends. The S&P Information Technology sector now offers a yield of only 0.33 percent, the lowest of all 10 sectors.
Talk of tax changes earlier this year was followed by Microsoft Corp.'s first-ever dividend announcement in January, while wireless technology company Qualcomm Inc. announced in February it too would pay a dividend for the first time.
WHITHER REITS?
Though real estate investment trusts (REITs) actually offer the highest yield, 6.9 percent, of the S&P sub-industries, they are not expected to benefit from lower taxes, Stovall said.
Stovall warned against buying a stock based solely on the dividend.
S&P has more than 60 companies that offer dividend yields in excess of 2.5 percent that carry "avoid" or "sell" ratings, including Eastman Kodak, rated "sell" despite a 5.9 percent yield, and Genuine Parts, also rated "sell" though it has 3.5 percent yield.
"The initial effect is to raise stock prices, but that should be a one-time gain unless dividends grow," said Milton Ezrati, senior economist and strategist, Lord Abbett & Co. which oversees $57 billion.
And while Richard Bernstein, Merrill Lynch & Co.'s equity strategist, recommends over-weighting high dividend yield stocks, he also noted that nondividend-paying companies in the S&P 500 have seen their stocks outperform those of dividend paying companies by 2,000 basis points this year.
3287.99
1275.09