The Relief Rally Begins

12/03/2012 8:45 am EST

Focus: MARKETS

Genia Turanova

Editor, Leeb Income Performance

Most of the time the great hope is that the politicians in Washington do as little as possible but this time around inaction was not an option; and it's paying off observes Genia Turanova of Leeb Income Portfolio.

Equities have put on a happier face in last week’s stock market action. All they needed, at least for the present time, was an indication that the politicians in Washington are willing to come together and do something about the impending “fiscal cliff.”

Of course, whether Congress and the White House will actually come to an agreement before year end that prevents our running off the fiscal cliff—and the dreaded “taxmageddon”—still remains to be seen. We expect some kind of a deal to be reached, simply because all sides seem to be in agreement now that failing to do so will significantly damage our fragile economy and hurt its chances for recovery.

Last week, Federal Reserve Chairman Ben Bernanke also weighed in, saying that uncertainty about the fiscal outlook “may be contributing to an increased sense of caution in financial markets, with adverse effects on the economy.” He also noted that an agreement on reducing the long-term federal budget deficit could remove an impediment to growth, while failure to avoid the so-called fiscal cliff would pose a “substantial threat” to the recovery.

In the meantime, quite a few US companies are lobbying hard for Congress not to go ahead with the dividend tax increase. Several have also acted—doing whatever they can for their shareholders in this uncertain situation.

First, in what may possibly become more of a permanent policy than a one-time deal, companies are increasingly paying special dividends.

According to Bloomberg, from the end of September to mid-November, 59 companies in the Russell 3000 stock index declared one-time special dividends, with many indicating that they did so because of the pending dividend-tax increase. This is up from about 15 in the year-earlier period. These actions will actually save money for shareholders should any form of  dividend tax increase take place.

Second, there is a trend developing in which companies, including Leggett & Platt (LEG) and Wal-Mart (WMT), move payment of their regular dividends to December, instead of the more typical January. A Wal-Mart spokesman commented on this measure by saying: “Wal-Mart’s board recognized that there are complex fiscal and federal tax rate issues that may not be resolved in the next few weeks.”

This will save shareholders some money. Plus, there’s a significant symbolic and public relations value to such actions, as these corporations are showing that they value their shareholders and are taking steps to help them by accelerating the payouts.

Indeed, sharply higher taxes on dividends would hurt investors and corporations alike. But again, we remain optimistic that some kind of compromise will be reached soon, be it a smaller increase or something else entirely. After all, too many investors who depend on dividends as a source of income will be significantly hurt otherwise.

We remain confident that the payment of regular dividends will continue to be a big reason we all invest in the stock market. Stocks remain attractive, and their total returns will certainly be augmented by share buyback policies and special dividends, the importance of which is likely to increase.

Related Readings:

A Lump of Coal for Investors

5 Tips to Climb the Fiscal Cliff

Slow and Steady Wins the Dividend Race

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