How many dividend paying companies are there in the S&P 500?
Through 9 July 2014, we count 425 companies among the components of the S&P 500 that currently pay cash dividends to shareholders. Our chart below shows how their number has changed since 1980, which we note is largely in response to how the U.S. federal government has set the tax rates for both dividends and capital gains.
In terms of the most recent trend, 85% of the companies in the S&P 500 are now paying dividends, up from the 70.2% that were in 2002, the last full year before the tax rates for both dividends and capital gains were once again set to be equal to one another.
Factors Affecting the Number of Dividend Paying Companies in the S&P 500
While recessions tend to temporarily lower the number of companies paying dividends, which we would expect since some of the 500 companies that make up the S&P 500 would lack the earnings needed to pay dividends during these periods of contraction in the U.S. economy, we find that the biggest driver of what affects the number of companies paying dividends to individual shareholders, pension and retirement plans, et cetera is the relative tax rates of dividends and capital gains with respect to each other.
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% (that's on paper - the real maximum capital gains tax rate was 49.9% as a result of an interaction with the maximum regular income 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%.
In the period before 1986, the number of S&P 500 companies that paid dividends to their shareholders declined from 469 in 1980 (or 93.8% of all companies making up the index) to 426 companies in 1986 (or 85.2%). After 1986, the number of dividend paying companies in the S&P 500 was largely stable, ranging between 426 and 438 for the next decade.
That stability ended 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, which plummeted from 427 in 1997 to 351 in both 2001 and 2002.
The Taxpayer Relief Act of 1997, by the way, caused the Dot-Com Bubble to form in the U.S. stock market.
That decline in the number of S&P 500 companies paying dividends wasn't reversed until 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%.
Since then, the number of dividend paying companies in the S&P 500 has rising from 351 in 2002 to 425 at this point in 2014, despite a recession-driven dip to 363 companies in 2009, and also the increase in the maximum tax rates for dividends and capital gains to 23.8% as part of the Fiscal Cliff tax deal in January 2013.
Data Source
Standard & Poor. S&P 500 Issue Indicated Dividend Rate Change. [Excel Spreadsheet]. Accessed 9 July 2014.
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