Ann Perry
The law provides lots of incentive for investors to buy dividend stocks. For those in the top four income brackets -- 25%, 28%, 33%, 35% -- dividend income is now taxed at 15% until 2008. Taxpayers in the bottom two brackets -- 10% and 15% -- pay 5% until 2008, when it drops to zero for that year.
After 2008, taxes on dividends will revert to their higher pre-2003 regular income-tax levels, unless Congress acts. A June study by two economics professors at the University of California, Berkeley found that after declining continuously for more than two decades, dividends distributions enjoyed a sharp and widespread increase following the tax cuts. According to Raj Chetty and Emmanuel Saez, nearly 150 companies initiated dividends that added more than $1.5 billion to aggregate quarterly dividends, and most were regular, recurrent dividends. "The surge in regular dividend payments after the 2003 reform is unprecedented in recent years," the authors said. In addition, many companies already paying dividends chose to raise them after the tax-law change and a smaller number paid special one-time dividends. On July 20, Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) announced it would issue a one-time, $32 billion special dividend to shareholders, worth $3 a share, the largest in history. The technology giant, which had for years not paid dividends, also announced it would double its annual dividend to 32 cents a share and buy $30 billion of its own shares to boost shareholder wealth. Mutual fund companies were also quick to respond. Fifteen out of 38 funds currently listed by the investment rating service Morningstar as dividend-based were created after the May 2003 tax law. Of the dividend funds, three new ones (see chart on top funds) have the highest year-to-date returns for 2004: (ADVDX Quote - Cramer on ADVDX - Stock Picks)Alpine Dynamic Dividend with 10.41%, (SWDIX Quote - Cramer on SWDIX - Stock Picks)Schwab Dividend Equity Investor with 8.28% and (CDGIX Quote - Cramer on CDGIX - Stock Picks)Crawford Dividend Growth with 7.60%, compared to a return of about 1.56% for the S&P 500 Index.| The Check Is in the Mail Undervalued Dividend-Paying Blue Chips |
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| Stock | Ticker | Price | Dividend | Yield | S&P Rated | |
| Altria (Tobacco) | MO | 49 | 2.92 | 6.00% | A+ | |
| Bristol Myers Squibb (Pharmaceuticals) | BMY | 24 | 1.12 | 4.70% | A | |
| Mercury General (Insurance) | MCY | 50 | 1.48 | 3.00% | B+ | |
| Atmos Energy (Utility) | ATO | 25 | 1.22 | 4.8% | B+ | |
| Popular Inc. (Bank) | BPOP | 24 | 0.64 | 2.60% | A+ | |
| Dow Jones Industrial Average | 10,174 | 211.26 | 2.10% | |||
| Source: Investment Quality Trends newsletter, First-September, 2004 | ||||||
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