Discounting the Dividend Effect, Part 2

In the first part of this two-part series, I discussed some of the implications of the change to dividend taxation. Now, I'll specifically address its relevance to Nasdaq investors.

Investors in the Nasdaq have a problem: The technology stocks that dominate this index are overowned, overloved and overvalued. Price exceeds value by a wide margin. That doesn't mean the Nasdaq will tumble anytime soon. Competition for capital is weak. The fixed-income markets are harboring plenty of risk, and the yield on cash, of course, is virtually nil.

Is there any way that technology investors can avoid a bloodbath in the coming months and years? I think there's a chance, however remote. But it would require the leading Nasdaq companies to recognize the handwriting on the wall: They're in a mature industry marked by overcapacity, deflation and meager growth.

That's the issue facing Microsoft (MSFT - commentary - Cramer's Take) and other overcapitalized tech companies. If the next cycle has subpar growth prospects, what's the best way to allocate capital? If the fundamentals stink, allocating capital for expansion and growth doesn't make any sense.

There's only one way to put a floor under tech valuations. And it's an alternative available to the leading tech companies because they're overcapitalized: Pay a fat dividend. Here's a look at what five leading tech companies could pay in dividends. I assume, below, that they pay dividends at the rate of 45% of earnings. Going back to 1900, that's the long-term average payout that was in place before the advent of the bull market of 1982-2000.

The last column is the important one. It adjusts the prospective yield for these tech stocks for their partially tax-sheltered return. The last column is the equivalent return you'd need to generate in the fixed-income market, taxed at a 35% marginal rate, vs. a 15% dividend tax rate.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.