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No Bull Market for Dividends

April 7, 1986

NEW YORK (AP) _ Dividends may be one of the mainstays of investing in stocks. But in a bull market nobody seems to give them much thought.

Consider the first quarter of 1986, during which the Dow Jones industrial average climbed more than 270 points. According to Standard & Poor’s Corp., there were fewer dividend increases declared over that period than in any first quarter since 1975.

The combination of soaring prices and lagging dividends has significantly lowered yields available on common stocks. The aggregate yield of Standard & Poor’s 500-stock composite index recently stood at 3.43 percent, down from 4.38 percent a year earlier.

Of course, yields should logically come down when the current return on interest-bearing investments, which compete with stocks, is falling - as it did with a vengeance in the first three months of the year.

And investing institutions, which focus on ″total return,″ don’t get particularly worried about low dividend yields when stock prices are rising handsomely. The Dow Jones industrial average jumped 17.6 percent from the beginning of the year through the end of March.

What’s more, individual investors, who unlike most institutions have to worry about taxes, tend to develop a fondness for capital gains rather than dividends when stocks are doing well.

Capital gains on investments held for more than six months get favorable treatment, taxed at a maximum rate of 20 percent. Dividends, by contrast, are taxed at ordinary income rates of up to 50 percent, except for a modest $100- per-taxpayer exclusion that may be eliminated in pending tax-reform legislation.

With all that, however, many stock market observers would like to see the dividend trend perk up a little bit this year, if only to reflect an improving economy and provide some extra support for stocks at their recent lofty levels.

According to Standard & Poor’s, dividend growth has been lackluster lately because corporate earnings, from which dividends are generated, haven’t been anything special.

″We are likely to see a pickup in dividend increases over the next several months, as the benefits of lower interest rates, lower oil prices and a weaker dollar are reflected in improved earnings,″ said Arnie Kaufman, editor of S& P’s weekly publication The Outlook.

″But we shouldn’t expect companies to become unduly generous. In chronological terms, the current expansion is quite far along, and fears of a recession will keep companies fairly cautious.″

The oil-price decline, while regarded as a major plus for many sectors of the economy, is seen by some analysts as a negative for the near-term outlook for dividends.

In March, S&P’s report shows 13 dividend reductions and 23 dividend omissions, the largest figures in either category for the past couple of years. As Kaufman noted, ″This reflects dividends cuts and omissions by energy-related companies, as a result of the continuing decline in oil prices.″

John Connolly at Dean Witter Reynolds Inc. argues that the worst of the news from the energy industry has not yet been heard.

″We are not very interested in investing in the oil patch. At least not yet,″ Connolly said in a commentary issued last week.

Before he concludes that energy stocks have bottomed out, he said, ″we want to read more about foreclosures and see an ungentlemanly exodus from these stocks. We also want to see a more general round of dividend cuts among oil producers and at least some idle chatter about the very biggest.″

End Adv Mon April 7

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