Tax Cut Continues To Boost US Company Dividend Payments

by Mike Godfrey, Tax-News.com, Washington

19 January 2005

The 2003 dividend tax cut is prompting US firms to pay out considerably more of their profits in the form of dividends, recent data has revealed.

After US companies paid out a record $181 billion in dividend payments to investors last year, the latest estimate from Standard & Poor’s predicts that this figure will be surpassed in 2005, with a 12% increase in dividends over the previous year’s figures expected.

Dividend payments by firms in the S&P 500 dipped significantly between 1980 and 2002, from 469 to 351, as US company bosses generally preferred to reinvest profits within the business. However, the tax cut package passed in 2003, which reduced dividend taxation for qualifying shares to 15%, was seemingly the catalyst for an almost instantaneous reversal in this trend.

Since the dividend tax was cut, 421 firms listed on the S&P 500 have announced increases in dividend payouts, with 24 companies announcing dividends for the first time, including Microsoft which distributed a massive $32.6 billion one-time dividend in December.

According to S&P, almost 1,300 firms listed on three exchanges increased their dividends last year.

The tax cut also appears to have boosted equity income mutual funds, while specialist mutual funds have been created since 2003 to take advantage of the cut.

Last year, a reported $25 billion was placed into equity income funds by investors – almost quadrupling the $6.1 billion channelled into the funds during 2002, the year prior to the tax cut.

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