Growth or dividend return? Featured

6:01am EDT August 31, 2004
True asset allocation dictates investing for both growth and dividend return in today's equity markets. The current tax environment, however, makes it a good time to evaluate the weighting in your portfolio.

Historically, dividend income has played an important role in enhancing investment return over time. In fact, between 1926 and 2002, approximately 42 percent of the return of the S&P 500 index was attributed to reinvested dividends.

Profits earned by corporations go to one of two places -- into the hands of shareholders as dividends or back into the corporation to be invested. During the go-go 1990s, corporations chose reinvesting rather than rewarding investors. The strategy worked well in a fast-growing economy, and investors were happy to receive compensation in the form of capital gains. However, the recent economic slump has changed that landscape.

In 2003, the importance of dividends was resurrected. To revive the slumping economy, the federal government introduced The Jobs & Growth Tax Relief Reconciliation of 2003, the third-largest tax cut package in U.S. history. Part of the package revitalized the significance of dividends.

Under the new legislation, certain dividend income paid by U.S. corporations -- and some qualified foreign corporations -- is taxed to individual shareholders at a top U.S. federal income tax rate of 15 percent (provided applicable holding periods are met). Under the old law, dividends were taxed as ordinary income at a rate as high as 38.6 percent.

Lower tax rates, along with increased profitability, encouraged corporations to increase their dividends dramatically.

According to Standard & Poor's, during 2003, the S&P 500 Index paid a record dollar amount in dividends, while more than 1,400 U.S. companies increased their dividends. As a result, it may be time to put the power of dividends to work in your portfolio. Source: Robert E. Coode, Skoda Minotti & Co., (440) 449-6800 or recoode@smcofinancial.com