The Dividend Story
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The Dividend Story

Historically, dividends have held much appeal for investors. Over the past 75 years, more than 50% of the annualized total return of the S&P 500 Index came from dividends. Dividends were de-emphasized during the 1990s, but with current expectations for price increases in a more moderate mid-to-high-single-digit range, dividend-paying stocks can assume a more important role in building total return for investors.

A Lost Decade: 1991 - 2000

During the 1990s, both investors and corporations discounted the importance of dividends and shunned dividend yields. As dividends fell out of favor, the portion of stock market total return coming from dividends fell to 23% during the 1990s, significantly below the 51% average for the 1930–2005 time period.1 From 1980 to 2001, the number of dividend paying stocks in the S&P 500 fell from a high of 469 to a low of 351. By early 2000, the average dividend payout for S&P 500 stocks slipped to a historical low of approximately 30%, as dividend growth significantly lagged behind corporate earnings growth. Dividend Contribution to Total Return, 1930s through 2000s

Dividends Make A Comeback: 2000-2006

With the arrival of the new millennium and the collapse of the internet stock bubble, investors started to shift from a growth strategy to a more value-oriented, conservative investment style. Likewise, corporations started to understand the appeal of dividends for investors. The Jobs & Growth Tax Relief Reconciliation Act of 2003, which lowered the maximum tax rate for qualifying stock dividends to 15%, once again made dividends a key ingredient in the investor decision-making process. Companies were motivated to revisit their dividend policies and make more disciplined, shareholderfriendly capital allocation decisions. Investors started demanding more dividends and corporations started to respond. In the 12 months ending November 2005, dividend-paying stocks returned an average of 5.29%, compared with 3.81% for non-payers.2 Eaton Vance believes the trend towards rising dividends will continue for some time and shareholders will reward such actions.

1 Hale, David. “Dividends Pay Dividends.” Barron’s. February 27, 2006.
2 ISI Group. "Portfolio Strategy Report." February 10, 2006.

A Brave New World: 2006 - ???

The future for dividends looks promising. Companies now have the means as well as the motivation to pay out higher dividends; they have a record amount of cash on their balance sheets, and cash flows and profits are increasing steadily. The number of S&P; 500 companies paying dividends increased to 388 in 2006 from its low of 351.2 Equally notable is the accelerating rate of dividend growth – dividends grew 19.8% in the first half of 2006, 13.5% in 2005, 11.8% in 2004, 8% in 2003 and 2% in 2002.1,2 Dividends have tended to be reliable indicators of a company's financial health. A company that generates consistent cash flows and growing dividends is in all likelihood a successful company.

Even though more companies are paying dividends now than at the beginning of the millennium, the yield for the S&P 500 is still below its 30-year average of approximately 3%. Of the 500 companies in the S&P 500 Index, 317 increased or initiated a dividend during 2005.4 At the same time, only 11 of the dividend-paying companies reduced or suspended their dividends. Current payout ratios are also at the low end of the 30%-70% historical range.5 Eaton Vance projects that over time, payout ratios will move closer to 50% of earnings, the long-term average for the S&P 500 companies.

Annual Changes in S&P 500 Companies' Dividend Policy 2003–2006 (through June 30)
Annual Changes in S and P 500 Companies Dividend Policy 2003 through June 30, 2006
Sources: ISI, Standard & Poor's

S&P 500 Payout Ratio Operating Earnings

S and P Payout Ratio Operating Earnings
Source: ISI



1 Hale, David. "Dividends Pay Dividends." Barron's. February 27, 2006.
2 Standard & Poor's Investment Services. July 2006.

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