U.S. companies are paying dividends at a healthy pace again, but they are unlikely to see the halcyon days from before the financial crisis.

Howard Silverblatt, senior index analyst at S&P, said that so far in 2010, companies in the S&P 500 index have enacted 255 dividend increases (resulting in payouts of about $21-billion to investors), compared with 157 last year ($10.7-billion).

Moreover, only four dividend reductions were registered in 2010, costing investors about $400-million, while 78 dividend cuts were recorded last year, resulting in $48-billion in payout losses for shareholders.

He noted that during the dark days of 2008-2009, a total of 140 dividend cuts were recorded by companies in the S&P 500 index, amounting to $88.7-billion in lost payouts to investors.

Silverblatt noted that while current conditions are good for dividends, too much economic uncertainty will probably preclude any spike in payouts by companies.

“Therefore, the decision comes down to a commitment of resources from the Board of Directors to the shareholders,” he said.

“The problem, at this point, is that the dividend commitment is long-term, and the prospects for economic stability over the next year or two are not at a comfort level that encourages strong long-term commitment. So we believe we’re more likely to see smaller increases that correspond to actual improving conditions.”

However, for 2011, Silverblatt doesn’t expect many decreases in dividend payments, and he estimate that two-thirds of the paying issues will increase their regular cash payments over 2010.
Given the current uncertainty of the economy and the market, that statement, in and of itself, is a powerful endorsement of the upward trend in dividends, he commented. Still, companies are a long way from the kind of payouts they made back in 2008.

“The best way to think of dividend income is as your salary,” Silverblatt postulated.

“The good news is that you received an 8.8 percent pay increase this year and next year looks like it could be a 9 percent increase. The bad news is that you are still making 18.5 percent less than you made in 2008, it won’t be until 2013 until you get back to 2008, and you need to make up the difference from somewhere, now.”

In the short run, Silverblatt thinks the two-year extension of the qualified 15 percent dividend tax rate will reduce the immediate pressure on companies to pay one-time extra dividends or to move up January payments to December.

“Longer term, the 15 percent lower tax rate becomes more attractive to investors, who currently have few alternatives,” he said.

“Boards which would have been more hesitant to issue and increase fully taxed dividends, and might have pushed for more buybacks, will now have a higher comfort level of the net return to shareholders, and one less reason not to pay dividends.”

Moreover, the two-year extension for qualified dividends to be taxed at 15 percent is estimated to add an additional $74.5 billion into the hands of individual investors, and bring the ten year tax savings to $ 48.4 billion (which is $348 not collected by the government).

“Overall, we project that dividend growth will continue into 2011, with a positive outlook for 2012 -- based on the assumption of an improving economy,” Silverblatt concluded. “However, on an aggregate basis it appears that we will not reach the 2008 level of dividend payments until 2013.”

S&P S&P