Companies Rush Dividends To Beat Possible Tax Hike
Many companies are giving shareholders special year-end dividends in the expectation that tax rates will increase next year. The dividend tax rate for high earners could jump from 15 percent to 43.4 percent. That's leading to a flurry of payouts, including sizable ones to company insiders.
DAVID GREENE, HOST:
And let's stay on this topic. For some people who own stock, there's a silver lining of sorts to the prospect of higher taxes, which brings us to today's business bottom line. An unusually large number of U.S. companies are handing out extra money in the form of dividends to their shareholders. And they're doing this earlier than ever. It's a way of helping their investors avoid next year's tax increases, which are likely to happen with or without the fiscal cliff. But as NPR's Jim Zarroli reports, not everyone thinks this is a wise business decision.
JIM ZARROLI, BYLINE: When companies want to make their shareholders happy, they hand out special dividends. It's a kind of bonus for staying onboard. And a lot of companies are sharing the wealth right now - more than three times as many as normal, says the data research firm Markit. A lot of other companies are rushing to hand out dividends before the year ends.
Michelle Hanlon is a professor of accounting at MIT.
MICHELLE HANLON: The question is whether to give a dividend now or later. But I think what they're doing is, the calculus is if we're ever going to give a payout now is the time.
ZARROLI: Now is the time because taxes could go up next year. Right now, investors pay 15 percent in taxes on dividends they earn. Next year, that could rise to 43 percent for the highest earners. By making the payouts before the end of the year, companies can spare investors higher taxes.
More than 40 years ago, Joyce Redden and her husband heard about a company from a man at their church and decided to buy $700 worth of its stock. The company was Wal-Mart and the Reddens have been earning dividends ever since.
JOYCE REDDEN: Every three months we receive a dividend. It's an addition to our income that we have. And we like it, we appreciate it.
ZARROLI: Recently, Wal-Mart said it would hand out its fourth-quarter dividend in late December instead of early January. The money saved will allow the Reddens - who are retired - to buy a little extra for Christmas. Redden says lower taxes allow the couple to help their children and grandchildren.
REDDEN: I want them to have a good life. I don't want them to have to struggle. And I think higher taxes, will make that more difficult.
ZARROLI: By helping their shareholders lower their tax bills, companies like Wal-Mart are buying a lot of investor good will. But they're not just being magnanimous. Research has shown that companies where executives own an unusually large amount of the stock tend to be especially likely to write big dividend checks, which means they're writing those checks to themselves. So there's a measure of self-interest involved.
Again, MIT's Michelle Hanlon.
HANLON: You might find some people that would argue that these managers are looking out for themselves and somehow it's, you know, a bad action on their part.
ZARROLI: But Hanlon says there's a counter-argument. Executives who own a lot of their company's stock also tend to be a lot more careful about the interests of their shareholders because they're shareholders too.
Jim Paulsen of Wells Capital Management says what's good for investors isn't necessarily in the long-term interest of a company. He says instead of handing out gifts to shareholders, many companies should be looking for ways to increase their growth potential.
JIM PAULSEN: What it really tells me or raises questions about, if the best thing they can come up with is to pay a special dividend to me, then that tells me they don't have many growth prospects.
ZARROLI: But at a time of so much uncertainty in the markets, investors aren't necessarily thinking about a company's long-term interests and for now at least, they're not likely to look a gift horse in the mouth.
Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.