Prolonging Tax Cut Will Save Investors $50 Billion

by Mike Godfrey, Tax-News.com, Washington

16 May 2006

Standard & Poor’s has calculated that investors in S&P 500 listed companies stand to save almost $50 billion in taxes as a result of the dividend tax cut extension agreed by Congress last week.

According to S&P, investors will save $49.4 billion as a result of extending the 2003 tax cut to the end of 2010 from 2008, when it was due to expire. For the full eight-year period, Standard & Poor’s expects the qualified dividend tax rate cut to save investors $149.7 billion.

The savings are based on the difference between the federal statutory tax rate and the qualified 15% dividend tax rate for shares held directly by individuals - excluding pensions, mutual funds and tax deferred retirement accounts.

“Since the start of 2003 there have been 972 increases and 45 initiations in the S&P 500, compared to just 26 decreases and 11 suspensions,” observed Howard Silverblatt, Senior Index Analyst at S&P.

“The action by Congress continues the incentive for both investors, via higher net returns, and corporations, which gain in the stability and long-term ownership that dividend investors represent," he added.

For the remainder of 2006, Standard & Poor’s expects a continuation in both dividend increases and initiations among S&P 500 constituents, resulting in a 12.4% gain in dividend payments. Total dividend payments for 2006 are expected to stand at $227 billion, compared to $202 billion in 2005.

Standard & Poor’s notes that while dividends are now growing faster than earnings, the dividend payout ratio had actually declined over the past few years, since fewer companies were paying cash dividends.

“We expect initiations to continue, especially in the Information Technology sector where only a third of the issues are currently paying a dividend,” explained Silverblatt.

“As more companies come onboard with dividends, the ratio will improve; albeit at a slower pace," he added.

Recommended