Big Apple Dividends

11/01/2002 12:00 am EST


Steven Halpern


“Not only is New York City the nation's melting pot,” said John Lindsay. “It is also the casserole, the chafing dish, and the charcoal grill.” Indeed, the diversity of the city was well matched by the extraordinary diversity of the investment, political, and media leaders that came together at The New York Money Show to share their insights with thousands of investors. In this special issue of The Money Show Digest, we will feature some of the highlights of The New York Money Show.

From Steve Forbes' appearance at the opening ceremonies to Rudolph Giuliani's Friday night fundraiser to the conclusion of Saturday's final workshop, New York was truly a Big Apple for investors during the past week. The Money Show's return to New York was long overdue; the prior New York event was in 1983, just one year into the start of what proved to be an 18-year bull market phase. Much has changed since then, and if any one theme resonated among the speakers at the recent Money Show, it was that investing in the 2000s will require a different discipline and focus than we had grown accustomed to during the previous two decades.

Several of the top speakers agreed that buy-and-hold investing in the future will present more challenges to investors than in the past. Many stressed that we are no longer in an environment in which investors can count on a rising tide to lift all boats, and that future investment success will require better education and more knowledge regarding asset allocation and stock selection. Thankfully, our speakers and exhibitors are there to help provide you with that knowledge.  In addition to a wide variety of specific investment opportunities, this issue of the Digest covers numerous strategies to help investors succeed in today's challenging markets.

I would caution readers that, as always, various experts can often view the same economy, statistics, and stocks and come away with different opinions. In this issue of the Digest, you will find advisors reaching opposing conclusions based on the same sets of factors. We include a forecast from Martin Weiss, in which he looks for the bursting of a housing bubble, while a number of advisors see continued strength in this area. Stephen Leeb sees rising inflation and higher prices for energy and gold, while Ralph Acampora sees weakness in these same markets, and John Murphy cautions investors to consider the possibility of deflation. We do not present opposing views to confuse you. On the contrary, differing opinions are the very nature of the investment markets, and we would be remiss to not share these conflicting, and sometimes controversial views. We provide the opinions of many of the nation's leading investment thinkers. It is up to you and your individual investment needs to determine what advice to incorporate in your own personal strategy.

Despite conflicting views, one underlying theme I heard through many speeches and conversations during The Money Show was a recognition of the growing importance of dividends in one's portfolio planning. In the early 1980s, it was not unusual to find top-quality blue-chip stocks yielding 4%, 5%, or 6% - or even more, with dividends making up a large part of the market's overall returns. But during the subsequent bull market years, dividends increasingly became less important than the quest for more speculative capital gains.

With The Money Show's return to the Big Apple, it appears that investor sentiment regarding the role of dividends may have come full circle. Once again investors and advisors see increased value in a real "cash return" from their stock holdings. Ed Finn, president and editor of Barron's, notes that a major lesson of the bear market of the past few years is the renewed importance of dividends. He says, "It’s true that dividends were spat on during the roaring bull market, but if the market is only going to go up 10% a year for the next five years as I predict, a one- or two- or three- percent dividend will mean a lot more than when the market was going up 30%. So I would look a lot more towards dividend-paying stocks."

Mary Farrell, director of investment strategy at UBS PaineWebber, adds, "Dividends are back to mattering. Because of the double taxation of dividends, we have seen a dramatic decline in dividend payout ratios over the past several decades. Back in the 1950s, the market yielded about 6.5%, while bonds were yielding 1.5% to 2%. The theory was that stocks were riskier than bonds, so you had to get a much higher return from dividends to justify owning stocks. The dividend yield from the overall market is now something like 1.5%. But I think companies are starting to realize that in these difficult times investors want a dividend. Paying a dividend is showing that you actually have earnings. You can’t pay dividends if you don’t have the cash to do so. We think this trend toward higher payouts will continue. Dividends are interesting from another standpoint because dividend yields now equal the interest rate available from short-term instruments. If you are an investor, instead of parking your money in a money market fund for 1.5% - where you're not even making the inflation rate and you will be taxed on it, getting a 1.5% yield from the market while you wait for stock price appreciation may look like a better deal."

Steve Forbes, president of Forbes, and well-known for his strong opinions on our national tax code, believes changes in the tax treatment of dividends could favorably impact the stock market. He explains, “Our current tax code encourages companies to go into debt. Interest payments are deductible and can be treated as an expense, whereas dividends are not. Dividends can be taxed two, three, four times. That’s ridiculous. In my opinion, dividends should be viewed as a return of capital. The tax has already been paid at the corporate level. All that is really happening is that capital is being returned to shareholders, and as such, it shouldn’t be taxed again. I would expect to see the administration propose either an easing or an end to double taxation.”

Louis Navellier, money manager and editor of both the Blue Chip Growth Letter and MPT Review, believes that potential changes regarding double taxation of dividends is a major positive brewing beneath the market's surface. He explains, “Getting rid of double taxation on dividends could cause the market to explode. Dividends get taxed on a corporate level and then you get the money and you are taxed at your level. Usually in high-tax states, dividends get taxed four times. Here in New York City it would be six times after Federal, state, and city taxes. So what happens is that when everyone is finished taxing dividends, up to 80% of the money goes to the government. A few weeks ago, when Alan Greenspan was testifying before Congress, he said if they wanted to fix the stock market, just get rid of double taxation of dividends. If there is a push for that it will cause the market to explode. It’s worth 2,000 points on the Dow.”

This special issue of The Money Show Digest features additional commentary and market opinions from Ed Finn, Mary Farrell, and Louis Navellier. We will offer in-depth commentary on politics, taxes, economics, and the investment markets from Steve Forbes in the next issue of the Digest, along with the top stock picks from the various members of the Forbes Newsletter Editors investment panel. For this special issue, we bring you the top stock picks and some intriguing market forecasts from the best of the best that converged on the Big Apple for The New York Money Show.

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