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As dividends rise, payout ratios remain low, low, low

Dividend investors received a double-shot of good news from Standard & Poor's on Monday: Dividend net increases in the first quarter (that is, dividend increases minus decreases) hit a record $24.2-billion, up 27.6 per cent over the first quarter of 2011.

But this part is even better: Despite the increases, companies are still paying out a relatively small portion of their earnings. According to S&P, the average payout ratio is below 30 per cent – versus an historical average of 52 per cent. That implies that companies still have plenty of financial flexibility to keep the dividend increases coming.

"At this point, we expect to see double-digit growth in actual dividend payments for the remainder of 2012, which would equate to a 16 per cent gain over 2011," said Howard Silverblatt, senior index analyst at S&P Indices, in a release.

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Still, Mr. Silverblatt noted that there is at least one cloud on the dividend horizon: U.S. taxes on dividends to individuals are expected to almost triple under current legislation, to 43.4 per cent. That could give companies second thoughts about paying out. "From a planning perspective, this will force corporations to re-examine their return to shareholders policy, potentially pull back on dividend increases and increase share buybacks," he said.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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