The Dividend Bust?

A close look at the effect of the dividend tax cut reveals a disappointing investor reaction.

 

While some predicted a very significant increase in price for utilities if dividend taxes were reduced, the actual price change data show a rather different picture.

Legislation enacted earlier this year substantially reduced the income tax investors pay on common stock dividends. Some analysts projected that this tax law change would lead to a sharp increase in utility common stock prices. After all, utilities have been thought of as income stocks-providing among the highest levels of dividend payout in the U.S. economy. Therefore, in theory, utility investors would have much to gain from a substantial dividend tax reduction. An easy slam dunk! Or was it?

In fact, utility investors have not responded as might have been expected. What explains this?

Breaking It Down

"The Jobs and Growth Tax Relief Reconciliation Act of 2003" ("the act"), was signed into law on May 28, 2003.