In 2002, total dividend payments on the index amounted to 16.08. This year, we see 16.85, finally topping the previous peak of 16.69 set in 1999. (The current indicated rate of 17.61 is forward looking and takes into account increases that came later in the year.) The expected 4.8% rise in payments this year still pales against an 8% gain in 1996, the best showing of the last decade.
In 2004, we project a dividend payment of 18.50, for an expected year-over-year gain of 9.8%. Despite that jump, the S&P 500's yield is likely to remain well under 2%, a far cry from the average yield of 4.4% in the 1980s.
Stocks used to be labeled overvalued if the index's yield fell below 3%. That rule of thumb lost out to changing times. The S&P 500 last yielded more than 3% in 1992.
Several factors contributed to the change. The composition of the index, which reflects the underlying U.S. economy, was modified to include more technology issues. Most did not pay dividends. Despite some high-profile examples of tech companies initiating dividends this year, most are likely to continue to avoid shareholder payments.
In addition, many corporate managements in the 1990s liked the control that retaining cash gave them. They could buy back shares and make acquisitions without having to worry about sending all that cash to shareholders. This was justified by the wide discrepancy in tax rates on dividends (considered ordinary income) and capital gains (treated preferentially). That argument can no longer be made.
Perhaps with a few years of strong dividend increases, the 3% rule of thumb will become valid again. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook