What affects the percentage of dividend paying companies in the S&P 500?
To answer that question, we turned to Standard and Poor's Indicated Dividend Change spreadsheet, which provides the data for the number of dividend paying companies in the S&P for each year since 1980. We've taken that data, combined it with some significant milestones and presented it in the chart in the upper right hand corner of this post.
We find that while recessions tend to lower the number of companies paying dividends while they're ongoing, which we would expect, we find that the bigger driver of what affects the number of companies paying dividends to individual shareholders, retirement and pension plans, etc. would appear to be the relative tax rate of dividends with respect to capital gains.
For example, in 1978, before we have data showing the percentage of S&P 500 dividend payers, the capital gains tax rate was reduced from a maximum tax rate of 39.9% (or 49.9% as a result of an interaction with the maximum tax rate) to 28%, which was then lowered to 20% in 1981. By contrast, the tax rate for dividends was the same as for personal income taxes, with a maximum tax rate of 50% beginning in 1982. Prior to 1982, the maximum personal income tax rate was 70%.
That changed with the U.S. Tax Reform Act of 1986, which equalized the maximum tax rates for both dividends and capital gains at 28%.
That changed again with the Taxpayer Relief Act of 1997. Here, the capital gains tax rate was reduced from 28% to 20%, while the tax rate of dividends was held at the 28% level. As we can see in the chart above, this change in tax law coincided with a dramatic drop in the number of companies within the S&P 500 that paid dividends.
That situation reversed in 2003, with the passage of the Jobs and Growth Tax Relief Reconciliation Act, which once again equalized the tax rates of both capital gains and dividends, but this time at 15%.
But, these rates have a sunset provision - they will only continue at the 15% level until 2010, when they will then revert back to much higher levels. Without an act of Congress, based on what we see in the correlation of the tax rates for both dividends and capital gains, it's likely that companies paying dividends will become more scarce after that time.
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