If investors clamor for
dividends, public
companies have to listen

NEW YORK » Although companies have amassed record stockpiles of cash, their dividend yields remain anemic. Some dividend-loving investors say it's time for that to change -- and companies may be paying attention.

As companies have cut dividends, they've increased stock buybacks. But investors say the buybacks are no substitute for dividends.

"What is a dividend but your payment as an owner of the company?" said Joseph Lisanti, editor of S&P's weekly newsletter, the Outlook. "If you don't get that, then the only way you can profit from you investment is to sell all of it or part of it. ... Otherwise, what's the return on your investment?"

Corporate management had sold institutional investors on the idea that buybacks, or stock repurchases, by a company are as good as or better than dividends. "Managers have really successfully convinced institutional investors that $1 of buyback equals $1 of dividends," said Douglas C. Eby, president of Robert E. Torray & Co. Inc. and a manager of the $1.5 billion Torray Fund.

Why? After a company buys back stock, those shares are no longer trading, so each share that remains on the market should be worth more.

But that argument became unconvincing while corporations were issuing millions of shares of stock options to their executives, diluting the worth of outstanding shares.

"They were buying those shares to offset the shares they had issued in conjunction with the issuance of options," Lisanti said. "It was, shall we say, a bit misleading. That may be over at this point, when they are forced to expense options."

Another way to get the pendulum to swing back to dividends is for money managers to demand them, Eby said.

"Our industry, the money management industry, is going to have to become more vocal with (corporate) management teams," he said.

Increased dividends assure investors a company's balance sheet is strong, said Jordan L. Irving, senior portfolio manager of the $458 million Delaware Dividend Income Fund. Dividends are a way for strong companies to "do something that's truly money in their (investors') pocket."

Dividend payments do fluctuate over time, but today's dividend yields are weak by historical standards. The historical dividend yield for the Standard & Poor's 500 is roughly 4 percent; the yield in July was a pale 1.70 percent. Justifying such a low yield isn't easy when companies in the index are sitting on a near-record $621.7 billion in cash.

Investors used to count on dividends for much of their returns. In the 1930s through the '50s, dividends were 60 percent to 80 percent of investors' returns, Eby said. In the 1970s, dividends were 70 percent of stocks' total return, Irving said.

But dividends waned in the go-go 1990s when upstart companies with no profits couldn't afford to pay them and growing technology companies argued that their money was better spent investing in the business or buying competitors.

Dividends became relegated to "old economy" companies, or troubled industries, such as tobacco, which paid investors a rich premium to hold on to their stocks.

But dividends are beginning to creep up, with or without money managers' prodding.

Technology companies have historically shunned dividends, but four of the nine stocks in the Standard & Poor's 500 that initiated dividends this year are in the tech sector.

Across the S&P 500, dividends are inching up; 207 companies increased their dividends through July of this year, up from 173 for the same period last year.

Rule changes are helping. The tax treatment of dividends changed in 2003 when a 15 percent tax on dividends replaced the tax structure, in which dividends were taxed at the same rate as investors' income.