"The Reasons Why Dividends Have Gone Down in Recent Decades"
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Why have dividends been decreasing so much if they're so important?
In 1958, an event occurred that shook the investing world. It's largely forgotten now, but it was important -- and it made many experts predict the imminent decline of the stock market.
The stock market's dividend yield went lower than the yield of a U.S. Treasure bond
*Gasp* -- oh, the horror of it. Right?
You may be yawning, but at the time it seemed an incredible event.
Because it was also believed that investors bought stocks for dividends
What was the point of putting good money into shares of stock if you didn't get anything in return for it?
Hmmm, maybe those old investing experts weren't so dumb.
They had the right idea, but everyday investors realized two things the experts didn't:
1. Unlike bonds, stock dividends would not end.
2. If they could eventually sell the stock for a price higher than they paid for it, they'd make money. That's the Greater Fool Theory.
No matter how much you overpaid for a stock, you'll always be able to find a Greater Fool to buy it from you.
#2 can be true but at best is wasteful and incurs unnecessary transaction expenses and capital gains taxes, none of which we want to pay. And we all know it's easy enough to pick a stock that, when we want to sell it, has gone DOWN in price!
#2 was encouraged by the --- tax law of 1981 that reduced taxes on capital gains from being the same as ordinary income to uuu percent. Back in 1958, the financial world was shaken by a profoundly important event -- for the first time, the average yield on stock dividends went lower than the average bond yield.
Many experts predicted a bear stock market
Stock prices had to go down, so that stock yields could go higher than bond yields.
After all, if investors could make more money by investing in the relative safety of bonds, why would they risk their money in common stocks?
Yet, they did. They continued to pile into stocks until the Dow Jones Industrial Average reached a high in 1966 that was not surpassed until 1981.
The common perception of investors buying common stocks gradually eroded away and changed into the perception that investors bought common stocks for capital gains, for price appreciation in the stock itself.
Dividends were secondary, of no real importance except to widows and orphans. (I don't mean to joke here. During this exact period, my mother was a widow who lived and raised myself and my sister primarily on the income she received from stock dividends.)
In 1981, to reinvigorate the economy, Congress passed into law and President Ronald Reagan signed the law reducing the tax on capital gains.
I believe that this was a good law. It certainly helped stimulate the economy and began a boom in the stock market that lasted from 1982 to 2000. The longest and greatest bull market in history.
However, in some ways, because it continued to tax dividends at the same rate as ordinary income, it encouraged investors to depend too heavily on capital gains.
The other 6 reasons for ignoring stock dividends are:
1. Double taxation of share dividends.
2. Need of young, "sexy" growth companies to spend all available money to stay ahead of competition -- capital expenditure.
3. Assertion by managers that they knew how to reinvest retained earnings for future growth.
4. Share buybacks. Management increasing stock prices by buying back stock from investors. This reduces the amount of shares available, thus increasing the market price of those remaining in the hands of investors.
5. Management fixation on pumping up stock prices to make themselves more money through exercising their personal stock options.
6. A financial culture or paradigm that glories stock price increases.
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7 Reasons to Invest for Income -- NOW More Than Ever
Rick Stooker
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