The Dark Side of the Dividend Boom

This dividend differential is important. As baby boomers retire, they will be looking for yield and will be more willing to trade higher-but-uncertain capital appreciation for lower-but-more-certain dividend income.

Bad Omen for Growth

Why dividend yields fell so low in the 1990s and why they're on a rebound now are open questions.

The cuts in taxes on dividend income pushed through by the Bush administration have helped put the dividend back on the table as a shareholder-friendly corporate strategy. The 2003 Jobs and Growth Tax Reconciliation Act reduced the top rate on taxes on dividends to 15% from near 39%. The new rate is a 70-year low.

But that doesn't seem to be all that's going on. In the 1990s, dividend increases failed to keep pace with rising stock prices, at least partly because companies thought they had better uses for their cash flow. When the potential return from reinvesting cash in the company seems high, companies are more reluctant to distribute cash to shareholders.

It's logical: If the return on reinvested capital is high, it is actually to the long-term benefit of shareholders for the company to refuse to pay out dividends and instead keep that cash for its own reinvestment. From this perspective, the drop in the dividend payout ratio in the 1990s was a tribute to corporate optimism about the opportunities for growth that they saw in that economy.

Something like the reverse of that thinking is playing a role in the recent growth of dividend payouts. Despite the strong economy, companies have been curiously reluctant to spend money on capital equipment and expansion. Corporate cash levels are climbing.

The technology sector is a key example. Investors think of this sector as the home of go-go growth companies, always looking for ways to raise cash to exploit the endless opportunities ahead of them. But, Standard & Poor's says, the 78 technology companies in the S&P 500 are sitting on roughly $140 billion in cash.