Relevant and even prescient commentary on news, politics and the economy.

Where Has All The Money Gone, Pt IV – Dividends

We’ve already seen in previous installments of this series that since about 1980, I: corporate profits have soared, II: the slice of profits going to finance has soared even more, and III:  wages have stagnated.  Here we see what corporations have done with all that money.   There is a limited selection set: pay taxes, distribute as dividends, pay down debt, invest, make acquisitions, speculate, and hold as cash.

Here is a look at taxes through 2008 and dividends through 2010, as percentages of profits; data from BEA table 7.16, lines 19, 20 and 38. For my purposes, profits are divided among taxes, dividends, and all the other things mentioned above, which I’ll call the Residual.


Dividends/ Profits are in green; Taxes/Profits in red.  I’ve added 13 year moving averages to clarify the trends over time.  The Dividend percentage bottomed in 1978 at 20.6%.  I’ve marked that year on both curves with a yellow dot.  After that, dividend payments took off sharply and have been mostly in the 40 to 50 % range since 1989.  The tax rate on dividends was reduced to 15% in 2003, also marked with a yellow dot, but I don’t think that change has had much effect on dividend payout.  The gyrations in the payout percentage since 2003 are largely due to the denominator affect, as profitability increased after the 2001-2 recession, and plummeted during the recent Great Recession.  Notably, 2010 profits are the highest ever. 
 
The tax payout drop lagged the dividend increase by several years, and didn’t start dropping until 1987.   In 1986, the tax payout rate was 45.2%.  After a sharp drop to 27.7% in 1992, the payout rate increased throughout the Clinton administration, topping at 34.5% in 2000.  Then, there was another sharp drop.  It has since leveled off, averaging 25% since 2004.

In 1978, the 13 year averages were 24.2% for dividends and 42.4% for taxes.  Those averages are now 28.3, and dropping; and 45.7 and rising, respectively  45.7 and rising for dividends; and 28.3% and dropping for taxes – essentially a reversal of positions.  The net result is a massive funneling of money from government to dividend recipients who now are paying only 15% tax on their dividend income.

This is not only “Starve the Beast” in action, it is a massive redistribution of wealth into the hands of those who already have the most.   Say what you will about the relative efficiencies of the private and public sectors in using resources, the public sector places money into the hands of people who will spend it and keep the economy moving.  The private sector largely funnels it into rent seeking.

For the sake of completeness, here is a look at the Residual – as defined above – with a 13 year moving average and a best fit straight trend line.

This provides a partial explanation for Jon Hammond’s observation that net corporate investment has been down over the duration.  There is less residual to invest.

Bottom line:  Corporate profits have been skewed to dividend payments, to the detriment of worker salaries, government tax revenues, and corporate investment.

Cross posted at Retirement Blues.

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And So Happy Xmas…Now with Canadian Content

A couple of days ago, James Bianco, chez Ritholtz, noted a WSJ article entitled “Dividend Stocks Become the Heroes”:

This year, the 100 stocks in the Standard & Poor’s 500-stock index with the highest dividend yields are up an average of 3.7% before dividend payouts, according to Birinyi Associates. The 100 lowest-yielding stocks are down an average of 10%.

Is this a good idea? I understand the move to dividend-paying stocks—companies that admit they don’t know what to do with their excess cash are almost by definition better-run than those that hoard it without announcing future plans for its use (hi, MSFT!). And some companies have a lot of excess cash right now.

But there is a difference between paying a dividend because it’s the best use of funds for your investors and having a high dividend yield. Don’t believe me? Ask Bank of America shareholders ($2.56 Annual Dividend, just under an 8% yield) ca. 2008:



Or those who bought The Big C for its $2.08-cents-per share Annual Dividend (around 6-7% yield) in late 2007*:

Of course, banks might be the except. But here’s the past five years of Toronto Dominion, which was paying around a 3% p.a. Dividend** around the same time period:

What would have happened to your overall investment if you had gone for the higher-paying firms? It’s not pretty:

I like dividends; they’re an admission from a firm that it doesn’t know better than its owners what to do with some of its cash. But high-yielding dividends are often a sign of bad management giving away “excess” cash in good times.***

The first rule of finance: when something appears too good to be true, it probably is. Caveat emptor and may all your investments for 2012 be good ones.

*The graphic scale and dividend amounts were distorted somewhat by the 10:1 reverse split earlier this year.

**An annual dividend of US$2.28, with the stock trading around US$70-75 per share.

***This is not an unusual story, sadly. The collapse of LTCM, for instance, occurred after the fund gave much of its investment monies back to investors and then count not remain solvent for so long as the market remained irrational. (The contemporary equivalent is MF Global.)

(cross-posted from skippy the bush kangaroo)

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A Warm Wind At the Backs of Some, Generated Off the Backs of Others

This piece offers an understandable comparison between wages and dividend income and neatly summarizes the cost to wage earners. (h/t Mike Kimel)

by Peter S. Meyers

Myers Urbatsch PC

A Warm Wind At the Backs of Some, Generated Off the Backs of Others Yesterday, I learned in this Mother Jones article that workers have increased their contribution to government revenue disproportionately since 1980.  In other words, payroll tax (paid by workers) is a larger portion of government revenue than it used to be.  That’s a macroeconomic analysis, which still doesn’t answer the question of whether rich people are being treated “unfairly” by the current tax system.

So to elaborate a little, let’s take two people who make exactly the same amount:  $100,000 in taxable income (after the standard deduction – let’s not get complicated).  “Worker Taxpayer” earns her money by working (getting compensation by way of a W2) and “Investor Taxpayer” earns her money from dividends in a $4 million stock portfolio she holds (its about 2.5% in yield – about right).  Let’s say they are both unmarried.  Investor taxpayer does not work and has no compensation income.  They are otherwise “equal,” right? (except that investor taxpayer fits the description of those who vituperate about lazy welfare recipients who sit on the couch all day and watch TV, right?)  I’ll keep the rhetoric down, because the facts are outrageous enough to speak for themselves.

Worker taxpayer will pay $7650 in payroll tax, plus $21,617 in income tax (2011 brackets), for a total tax burden of $29,267.

Let’s look at investor taxpayer.  You would think they would be taxed at the same rate as worker, right?  Wrong.  Because investor taxpayer receives all of her income from qualified dividends, they get a “special” tax treatment.  Bear with me, we’re almost done.  Generally, the maximum tax rate for qualified dividends is 15%, BUT HERE it is actually 0% because investor’s other income (remember she doesn’t work) is taxed at the 10% or 15% rate.

To refresh:  worker making $100K pays about $30K in tax.  Investor making $100K in qualified dividends pays $0 – no – tax.  Huh?  Yup. 

What this means is that rich people – who are incented by tax policy to remain on their couches (too much earned income would otherwise trip them into the 15% dividend tax bracket) – are now getting off their couches and going to tea-party rallies to maintain this unfair redistribution of wealth in their favor.  For if they work, they risk having their dividends taxed at 15% (still half of what, say, worker taxpayer paid in taxes, but confiscatory in their view).  Perverse incentive?  Yup.  Does it sound like the rhetoric of the right wingers about unemployed persons and welfare recipients laying on couches and not incented to work?  Hm. . . .

Now let’s say you didn’t work, or you worked very little, and instead you made all of your income from qualified dividends.  The “magic number” (the income threshold you need to stay under to avoid paying any tax on your dividend income) is $69,000 (married), $34,500 (single or married filing separately) or $46,250 (head of household).  Thus, you can actually work a little, and you have all this extra time – to attend rallies, political functions, cook your food, clean your house or do other things that people who actually earn their income from working have to: (a) pay someone else to do (which is not deductible), (b) do in the evenings or on weekends, or (c) simply let it slide.

I will now illustrate how it is almost impossible for someone who is already rich to not get richer, in fact much richer.  Both working taxpayer and investor taxpayer have identical lifestyles and thus spend the exact same amount of money (not likely, given that worker has to pay for commuting expenses – again NOT deductible).  Let’s assume that’s $70,000 per year.  We know that worker taxpayer already paid $30K in tax, so let’s see what they have left to save:  uh, nothing.  Investor taxpayer paid no tax, so what do they have left over to save: $30K.  Exactly the same amount that worker taxpayer paid in taxes.

The rationale for the tax policy you see illustrated above is George W. Bush’s.  In 2003 he said that “double taxation is bad for our economy and falls especially hard on retired people.” He also argued that while “it’s fair to tax a company’s profits, it’s not fair to double-tax by taxing the shareholder on the same profits.”

Its odd to me that the above disparate treatment of otherwise similarly-situated earners is defended on the basis of “fairness.”  Is this 1984?  And I also wonder whether there is a joke in there somewhere – i.e., given that a zero-percent tax bracket would apply to someone who made all of their money from dividends and capital gains, why wouldn’t they retire?  I sure as hell would.  Working too much would bump all of their dividend income into the 15% tax bracket.  Volunteering for the tea-party rally, or perhaps some other Republican cause, would be a far better use of one’s time.

reposted with permission of the author July 23, 2011 post

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Ratings, Stocks, and Credibility

There is a reason I never believe people who judge the health of a company by its credit rating: the evidence isn’t there, and everyone in the market knows it isn’t there.

Here is a prime example: General Electric (GE; the company that Jack eviscerated) has a AAA credit rating. It is also paying a 31 cent per share quarterly dividend.

The stock is trading at $12/share as I type.

That’s a yield of 10.31%, per MarketWatch.

The 30-year Treasury, as I write (presumably the Friday close) is yielding 3.32%.

Rounding off—I doubt anyone would seriously quibble the basis point—we have an allegedly-AAA company whose stock is trading 7.00% above Treasuries. At a time when the average “redemption yield” for investment-grade bonds is 6.47%.

Now, in sane circumstances, people would be saying, “Oh, but that’s because GE will, certainly, cut its dividend. And investors know that.” However, CEO Jeffrey Immelt (the man charged with cleaning up Jack’s mess, who instead compounded his predecessor’s actions) assured investors that the dividend will not be cut, even as he noted that GE expects an “extremely difficult” 2009.

Moody’s has GE on credit watch with “outlook negative,” but they’ve only been there since 13 January 2009. This is a company that is paying about 15% of its net earnings out in dividends. Calling GE “not a growth stock” is like calling Sears anything other than a real-estate play: so bloody obvious that it shouldn’t need to be said.

Yet, for some reason, it needed to be said. And Moody’s is hanging there, ten days into “outlook negative” while the bleeding stock market is screaming “junk bond yield” on the equity.

Don’t get me wrong; GE is probably still investment grade. Their store credit card business ownership of NBC and affiliates consumer products division defense contracts alone should keep them there. But that’s what we said about GM too.

GM stock, which is the downside risk cited by MarketWatch, is currently yielding 28.5%. If General Electric (GE) were yielding that level with the current dividend, it would be priced around $4.35—about another 64% decline. [As noted in the comments, GM has suspended its dividend and actually yields nothing; the MarketWatch site for some reason reports the yield based on the suspended dividend anyway. -ATB]

If you’re asking me, this points the way to a good piece of the other part of the “equity premium puzzle.” But more on that in a later post.

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