Sunday, May 29, 2005

Dividend Paying ETF (DVY)

Recently congress changed the tax laws that punished companies that paid dividends. Dividends were essentially subject to "double taxation" - the corporations paid tax on the dividends before they paid them out to shareholders and then the shareholders paid tax on them AGAIN (as ordinary income) in their own returns.

The effect of this law was that it didn't make sense for most companies to pay out dividends from a financial perspective. The change in the law said that dividends were essentially going to be taxed at a lower, 15% rate to investors, which mitigated most of the double taxation impact.

As a result, many companies are re-thinking their dividend policies. Companies that never paid dividends previously, like Microsoft, are now paying dividends, and Microsoft also did a big one-time dividend out of their massive cash hoard (better than paying for those stupid dinosaur head ads that I hate).

Paying dividends and thinking hard about whether to re-invest the cash available in the business or to pay it out to shareholders has a salutory effect on companies. I know that companies are now seriously considering giving this cash back to shareholders rather than plowing it into acquisitions or expansion, and even if they choose not to give this money to shareholders they know that there will be heightened scrutiny if their plans go awry and they could have given this money back.

There is an ETF with the ticker DVY that invests in companies that pay dividends. These companies are mainly financial institutions and utilities but is expanding as more companies pay dividends. You might want to check them out if you are tired of paying taxes on interenst income, although with any stock the change in the principal value (underlying stocks) may more than make up for the dividend stream.

Note that this graph really doesn't tell the whole tale because in addition to the increase in the value of the underlying stocks (reflected in this graph) along the way there has been a substantial pay out in dividend income (taxable at the lower rate), as well.

Here is an article about the trend towards dividends...
Posted by Hello

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