Salmon: Why Companies Are Raising Their Dividends

NEW YORK (Reuters Blogs) -- Matt Yglesias presents the case against dividends today -- and it's a case I'm sympathetic to. But before you can determine whether stocks should be paying dividends, it's important to understand why stocks are paying these dividends. And the answer is in the chart above.

The blue line, in this chart, U.S. after-tax corporate profits as a share of GDP -- and it shows that they're at an all-time high of around 11%, when they're normally closer to 6%. This is the chart that should worry anybody invested in the stock market: While the market's price-to-earnings ratio still seems pretty sane, that's only because corporate earnings are much higher than they've ever been in the past. If this number starts reverting back towards its historical mean, then stock prices are certain to fall, possibly quite sharply.

What investors are looking for, then, is reassurance that the impressive profits they're seeing today are here to stay, rather than being some kind of historical anomaly. And so that's also the message that CEOs are seeking to send to their shareholders.

It's here that dividends start being a lot more attractive than stock buybacks. It's exactly the same reason that you'd much rather get a thousand-dollar raise than a thousand-dollar bonus. Dividends aren't bond coupons: they can go down, if they have to -- and, in hard times, you can be sure that they will go down. But in general, no company will set a dividend this year which it doesn't think it can meet next year, and the year after that, and the year after that. A dividend is a company telling the market that the cash it's throwing off today isn't some kind of exceptional good fortune, but is rather something that shareholders should get used to, year in and year out for as far as the eye can see.

If you liked this article you might like

Amazon Roadkill; Northrop Deal Synergies -- Jim Cramer's Top Thoughts

Food Stocks Go Hungry; China Pressure -- Jim Cramer's Top Thoughts

How eSports Leaders Are Making a Business Out of the Professional Gaming Market

Why Amazon's Reported Smart Glasses Might Be Just a Niche Product -- For Now