If lower tax rates made stocks more appealing, they figured companies that raised their dividends would see their stock prices surge.
It turned out that the most generous companies, the top fifth in terms of dividend yield, fared the worst over the two years, while stingy stocks did well. Companies weren't being rewarded for paying dividends, and they scaled back.
"After the Bush tax cuts you'd think, 'Hey, here comes a surge in dividends,'" says Morrow, the Fidelity fund manager. "What did we see? The exact opposite. Dividends are at an all-time low."
Companies in the S&P 500 paid 27 percent of earnings to investors in dividends last year, according to research from Goldman Sachs. Over the past 50 years, the payout ratio has rarely dropped below 40 percent.
If history is any guide, companies may decide to protect investors from higher taxes by rewarding them with higher dividends, according to a Goldman Sachs report.
In 1960, when Dwight D. Eisenhower was president, rich Americans paid a tax on dividends as high as 91 percent because that was the top marginal income tax rate. And companies were much more generous. They paid 64 percent of earnings in dividends.
Even assuming dividend taxes rise, dividend-paying stocks will still be an attractive alternative to some other investments.
For example, 10-year Treasurys yield about 1.6 percent. That's substantially below the average 2.6 percent yield of dividend-paying companies in the S&P 500. Both would be taxed as ordinary income.
Koesterich, from BlackRock, says companies have plenty of room to raise dividends to compensate investors for the bigger cut they're handing to Uncle Sam.
"They certainly have the ability," Koesterich says. "And they know a substantial portion of people are buying their stock because of the yield."
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