Dividend Growth Off As Economy Cools

FOR investors, 1989 has been a very good year for dividends. But that may change in 1990 as the economy slows further. The total of all dividends paid on stocks that make up the Standard & Poor's 500 index is expected to be up around 14 percent this year compared to 1988, according to Arnold Kaufman, vice president and editor of S&P's Outlook, a weekly market report. But dividend gains for 1990 are expected to fall back into the more typical 6 percent range, Mr. Kaufman says.

Dividends, of course, have always been one of the primary inducements for owning equities. Dividends are payments made to shareholders out of company profits, usually on a quarterly basis. In the case of small capitalization or growth stocks, investors may not care much whether dividends are paid or not, since the objective is long-term appreciation. But some stockholders, particularly older investors, often buy stocks for their current dividends. These equities are what the investment community calls income stocks. Many investors reinvest dividends.

The growth in dividends reflects favorable economic circumstances. ``Dividends jumped because there were exceptional corporate earnings in the past several years,'' Kaufman says. He warns, however, ``Most of the strength in dividends occurred during the first half of the year. In the last few months, dividend growth has been tapering off, as well as the number of companies issuing dividends.''

Regarding dividends, 1989 ranks as the fifth highest year in the number of dividend gains in the post World War II era, surpassed only by 1977 and, before that, 1947, 1949 and 1950, says Evelyn B. Feit, an analyst with Kidder, Peabody & Company. Ms. Feit notes that during the first 10 months of this year, some 1,751 positive dividend actions were taken, including 340 extra payments, 1,375 increases, and 36 resumed dividends.

Since capital gains are now taxed at the same rate as income, the US tax code is more neutral toward dividends. Thus, for many investors, appreciation may not be as important a reason for holding a stock as in some past investment climates.

But dividends have always been important. If you look at total return on equities - that is, all the financial gain arising from owning stock, dividends are quite valuable, says Eric Hanson, associate vice president of Fraser Management Associates, Burlington, Vt. Since 1926, he notes, ``one half of the total return of equities has come from dividend income, the other half from appreciation.''

Kidder, Peabody, for its part, now predicts that ``the pace of S&P 500 dividend advances will slow to 5.4 percent next year'' from the 14 percent or more gain expected this year, says Feit. Dividend cuts are also likely, she says. Indeed, some 187 negative dividend actions (including both cuts and ommissions) have been made so far this year, she says. More than 144 negative actions were taken in 1988.

Looking beyond next year, Feit believes that the longer-term dividend outlook is favorable.

While corporate profits in general are not expected to be as high during the months ahead, thus cutting into dividend increases, such sectors as retail stores, pharmaceuticals, beverages, newspaper publishing, and database publishing will all post good dividend increases next year, Feit believes. Moreover, a number of important sectors that had to make cuts during the 1981-1982 recession are now in a strong position to maintain dividends, even if a recession were to occur, Feit says. She points to such sectors as aluminum, steel, and copper.

Many companies that have made annual dividend increases are also expected to do so next year, no matter how the US economy performs, according to Feit.

Companies making dividend increases throughout the 1980s, even weathering the 1981-1982 recession, include Dayton-Hudson, Washington Post, Dow Jones, Consolidated Edison, Johnson & Johnson, J.C. Penney, K Mart, Citicorp, McDonald's, Procter & Gamble, and Dun & Bradstreet.