Source: J.P. Morgan Guide to the Markets

 

 

This is a question that does not get discussed enough — Why are US dividends so much lower than the rest of the world’s ?

 

Category: Digital Media, Dividends

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33 Responses to “Why Are US Dividends So Much Lower Than the Rest of World?”

  1. wcvarones says:

    Mathematically, it’s either the valuation or the payout ratio, or both.

    US stocks have higher P/Es, which would lead to proportionally lower dividend yields.

    The more interesting thing to look at would be the payout ratio. I suspect it’s lower in the U.S. for cultural, sector, and tax policy reasons (not all countries may double-tax dividends as we do).

  2. DSS10 says:

    A perceived risk premium? Having done international M&A and due diligence I could see international funds paying for some relative amount accounting integrity and commercial law protection

  3. RW says:

    Only thing I can think of is rock star who was asked why you guys (rockers) always date beautiful models and answered, “because we can.”

  4. Moss says:

    To answer that I suspect u would also need to compare executive compensation.

  5. dpharris says:

    Preferential tax treatment for capital gains?

  6. jaymaster says:

    I discovered this phenomenon several years ago, while chatting with some European friends. Their explanation was that it’s just a traditional/cultural kind of thing, at least in Europe.

    Folks tend to be focused more on income investing over there, as opposed to rah-rah capital appreciation, so more companies operate under that philosophy.

  7. Ramstone says:

    Executive Stock Options.

  8. ex1 says:

    buy backs

  9. george lomost says:

    Barry, as an investment manager who allocates rather significant amounts of money for various assets, including stocks, what behavior do you and your investment manager peers reward?

  10. rd says:

    “Mr. Darcy soon drew the attention of the room by his fine, tall person, handsome features, noble mien, and the report which was in general circulation within five minutes after his entrance, of his having ten thousand a year” – Jane Austen in Pride and Prejudice

    In many cultures, wealth is viewed as the ability to generate lifetime income. However, wealth in the US is generally viewed as the total of the capital base an individual has instead of its ability to generate income through dividends, interest, rent etc. So culturally, the US has a much bigger desire for capital appreciation than income – this appears to be heightended during major stock market and property booms, such as the 1920s and 1990s-2000s. One of the outcomes of crashes and depressions appears to be an increased desire for “safe and reliable” income to live on.

  11. Petey Wheatstraw says:

    Greed? Companies saving up cash in order to be fully-fledged Job Creators? Illiteracy and innumeracy of the average American SM participant? Machines trading with machines – who get their dividends in the form of machine oil or upgraded circuitry?

    What does not trickle down, trickles up.

  12. formerlawyer says:

    One answer may be:
    “The taxation of dividends can be split into two major categories: classical and imputation. These major categories lead to very different incentives for managers to engage in corporate tax avoidance. The United States and many other countries have some version of a “classical” tax system for corporate income, which imposes tax on income at the corporate and shareholder levels at the applicable tax rates. This tax system results in economic double taxation: different taxpayers are taxed on the same income. In a classical tax system, any dollar saved because of corporate tax avoidance increases the after-tax cash flows to the shareholders, thus giving managers an incentive to avoid taxes on the shareholders’ behalf. Modified classical systems, which have preferential tax rates on dividend income relative to interest income, provide managers with similar incentives for corporate tax avoidance. [the situation in the US] Another possible tax system, similar to a modified classical system, is an inclusion system. Rather than having preferential tax rates for dividend income like the modified classical system, shareholders receive a preferential tax base in an inclusion system because only a portion of the dividend is included in their taxable income. As a result, inclusion systems, similar to classical and modified classical systems, incentivize managers to engage in corporate tax avoidance in order to return more after-tax cash to their shareholders.
    Other countries impose only a single layer of taxation on corporate income through a dividend imputation system. An imputation system imposes a tax on corporate income, but the shareholder receives credits for the taxes paid by the corporation such that that the shareholder pays only the difference between the corporate tax rate and the shareholder’s tax rate on dividend income. As a result, the overall tax burden on dividends in an imputation system is equivalent to the shareholder’s tax burden and corporate tax avoidance simply shifts the tax burden from the corporation to the shareholder. Currently Australia, Chile, Mexico, and New Zealand have a full imputation system where a tax credit is given to shareholders for the full corporate tax. Canada, the United Kingdom and South Korea have partial imputation systems where shareholders receive a tax credit for only a portion of the corporate tax. The United Kingdom is the only member of the EU that has maintained its imputation system. France, Germany, Spain, Italy, Ireland and Finland have all had imputation systems at some point but from 1999 to 2006 they all moved away from imputation systems.”

    From: Dan Amiram, Andrew M. Bauer and Mary Margaret Frank, “The Effect of the Shareholder Dividend Tax Policy on Corporate Tax Avoidance”
    http://aaahq.org/ata/meetings/midyear-meetings/2012/2012%20RIP%20Amiram%20Bauer%20Frank.pdf

  13. gman says:

    Why does the US have higher executive compensation as % of revenue than on other nations? I suspect the two variables are related. Executives in the US treat shareholder money as if it is theirs NOT shareholders. Theirs for lobbying against disclosure, against shareholder rights etc…theirs for BONUSES and stock buybacks to gun share prices relative to the executive options strikes and expiri. Theirs for meglomanical and ill thought out acquisitions

    The last thing US management would want to commit to is being obligated to give shareholders their money at regular intervals.

  14. A says:

    Well, one reason may be tied to corporate compensation systems.

    It doesn’t make much sense to pay shareholders if the retention of earnings impacts the payouts of the top executives. I doubt that it’s a secret anymore, that execs look out for themselves first and foremost, rather than the so-called ‘investors’ who fail to read proxy’s, 10Q’s or 10K’s.

    Anytime you wish to understand executive behavior, ensure you understand the structure of their compensation systems. It isn’t focused on shareholder value, like it should be.

    Most retail ‘investors’ would not understand this. Here is a site to help you see the exec goodies examples: http://www.footnoted.com/

  15. dctodd27 says:

    Um, probably because US markets are more overvalued than the rest of the world. Be patient – dividend yields will get better as reality takes over.

  16. agronox says:

    I’d be willing to bet that US companies are also more highly indebted than international ones.

    There’s a giant preference in the tax code for funding your company using debt instead of equity, so it should be no surprise we see that. Couple it with ANOTHER massive tax preference for capital gains versus dividend income, and there you go…

  17. richardcherron says:

    Better governance and smaller block holders in the US (less need to return free cash flow)?

  18. MorticiaA says:

    According to my CFA textbook, “Since the early 1980s in the United States and the early 1990s in the United Kingdom and continental Europe, the fraction of companies engaging in share repurchases (as an alternative way to distribute cash to shareholders) has trended upwards.” Then there’s a footnote regarding the U.S. comment, “Important in the United States was the adoption of Securities and Exchange Commission Rule 10b-18 in 1982, which relieved companies from concerns of stock manipulation in repurchasing shares so long as companies follow certain guidelines.”

    The CFA Level 2 cirriculum asserts that repurchases tend to be favored for many reasons, one of the big reasons to avoid having to curtail a dividend due to the signal it sends. Repo’s aren’t expected by investors so a repurchase gives companies the flexibility PLUS they can send a positive signal that mgt thinks the stock’s worth more than it’s market value.

    How’s that for a dry, academic explanation?

  19. wally says:

    What RW and Petey said. US corporations have managed to shut out effective shareholder input. It is a part of the Cult of Equities, which is promoted constantly to the public in the US by virtually all media, including blogs.

  20. richardcherron says:

    … and substitution to repurchases over the past few decades.

  21. Martin Barry says:

    It’s all about how different forms of income are taxed.

    Australia has high dividend ratios because tax paid by the company can be passed through as a tax credit to the shareholder, thus avoiding double taxation. No preferential treatment for capital gains income amplifies the difference further.

    The reverse is true in the USA where dividends are taxed twice, once for the company profits and for the shareholder’s income. Returning profits through any mechanism that counts as capital gains rather than regular income is also preferred due to the different tax rates.

  22. ldaalder says:

    As a European, I know that on balance there is a higher preference for dividends in Europe, while there is a higher interest in buybacks in the US. How much that is related to greed (buybacks boosting the stock price versus dividends depressing it), taxes, sectoral differences (tech stocks generally have lower dividends than financials for example, the US being tech rich) or just local preferences I am not sure. Probably all four play a role.

  23. constantnormal says:

    A damnfine question … personally, I’m all for each and every publicly-owned corporation being required by law to pay out (at least) 20% of their after-tax profits as dividends.  

    If somebody goes so far as to eliminate the double-taxation (either by making deductions tax-exempt to the recipient or by allowing them to be deducted from corporate taxes), I’d be happier, but I’d be happy by just having companies promptly return a share of their profits to the stockholders, doubly-taxed or not.

  24. b_thunder says:

    1. Recency: 1982-2000 was PE expansion driven bull market, nobody paid any attention to dividends.
    2. Until 10 years ago dividends were taxed higher than capital gains
    3. Everyone wants to get rich quick – buy that weekly call that can double overnight. Or at least buy the next MSFT, CSCO, DELL, AAPL
    4. Wall St wants you to “play” the aforementioned “get rich quick” stocks. Wall St. also wants you toy trade early, and trade often.
    5. The media (and especially CNBC) predominantly talks about stocks that “move,” not about the total return over a 5 or 10 year period.

  25. DiggidyDan says:

    What Moss said. If you compare them two, I bet there’s an inverse relationship between them on the broad perspective.

  26. 3. Everyone wants to get rich quick – buy that weekly call that can double overnight.

    b_thunder,

    quite droll~

    “Everyone…buy that weekly call..”

    c’mon..

    ~80% of TBP ‘Readership’ doesn’t, even, know what ‘Weekly Calls’ are, let alone ‘Everyone’..

    really, Funny.

  27. though, more seriously, there are ‘Clues’ to be found here, at least..

    http://www.ritholtz.com/blog/2009/06/vanguards-jack-bogle/

  28. Robert M says:

    I’ve no idea why they are so low. I do think the way to raise them is to end the double taxation of them. Just let whatever is paid out be taxed by those who hold stock as ordinary income. Individuals looking for income from their assets would flood into stocks. The other upside would also be more individuals putting pressure on the political system to straighten out the SEC, corporations and others as their income would be threatened.

  29. timario says:

    1. Tax treatment of capital gains vs. dividend income encouraged share buy backs as a (fictional) way to return capital (despite overly generous options/share grants to insiders). Also, there is no cap gains tax until shares are sold.

    2. Managers generally compensated by the size/market cap of the company therefore retaining earnings leads to larger compensation. Shareholder representation is virtually non-existent.

    3. Media (CNBC etc) promotes stocks as trading vehicles, not income generators

    4. Large net inflows of capital into equities over the past 20 years supported rising prices and high p/e ratios.

  30. felicen6 says:

    The US tax system is to blame. Not only do you have the historical preferential treatment of capital gains but also the
    case of debt funding of companies being a write off as opposed to share issuance where tax is paid before dividends are paid

  31. SecondLook says:

    Dividends started declining as a factor in investing as far back as the late 1950′s. Prior to then, investors demanded, at least, a higher yield from equities than Treasury bonds. Strong dividends were seen as a cushion against the risk of owning stocks. Most investors back then were institutional; insurance companies, corporate pension funds, Banks managing trust funds, etc. They were, prudently, risk adverse.

    Things changed in the 60′s, a different class of investors perhaps; new ideas in economics about risk/reward; the increasing rise of a managerial elite, etc. More and more stocks were valued on their growth potential and less and less on total return – which is still the pervasive attitude today.

    As for why dividends are higher outside the US? Investors in other countries never moved past that earlier attitude, that stocks are inherently risky, and that demands some safety net in terms of a good yield. Don’t offer one, and the stock languishes.

  32. ironman says:

    First, note that the charts above show dividend yields, which is dividends per share divided by price per share. The magic combination that gives U.S. stocks their lower dividend yield is lower dividends per share and higher share prices.

    A very big reason why that is has to do with the double-taxation of corporate income and dividends in the U.S., which gives it the fourth-highest effective tax rates on dividends in the world.

    The other big reason why that is has to do with how the economies of other nations are structured – many like France and the U.K., which both actually impose slightly higher tax rates than the U.S., have very close integration between businesses and their governments (aka “socialism” or “corporatism” or “crony capitalism”), which has really exploded here in the U.S. since 2008. As a result of that economic structure, big businesses in these countries are less subject to competition than was typical in the U.S. and they are therefore able to earn relatively higher profits, which then come out as higher dividends.

    Just as a frame of reference – if you look at the top companies in highly socialized France, for example, it’s pretty likely it’s the same list as it was twenty years ago. The same is not true in the U.S.

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