Gold-Plated Dividend Stocks Don't Get Much Help From Tax Bill (LLY, SVU, TEG, MKC, HRL, ECL, USB, BK, GE, PFE)

To make the cut onto the Standard & Poor’s Dividend Aristocrats Index a company has to have paid a dividend every year for at least 25 consecutive years. The index includes at least 40 stocks and is rebalanced every year in December. S&P announced early this month that it was dropping three stocks from the index and adding three others. The dropped stocks are Eli Lilly & Co. (NYSE: LLY), Supervalu Inc. (NYSE: SVU), and Integrys Energy Group Inc. (NYSE: TEG). The additions will be McCormick & Co. Inc. (NYSE: MKC), Hormel Foods Corp. (NYSE: HRL), and Ecolab Inc. (NYSE: ECL).

S&P reported that the Dividend Aristocrats posted an annualized dividend yield of 2.9% in 2009, compared with a yield of 2.01% for the S&P 500 Index. But MarketWatch notes that the Dividend Aristocrats gained an average of just $0.02 from late Monday to Wednesday’s close. That’s a gain of just 0.004%, compared with a gain of 0.4% in the S&P 500.

The proposed tax bill agreed to by President Obama and Republican legislators on Monday extends the 15% tax rate on dividends, but apparently that wasn’t enough to light a fire under the Aristocrats.

The performance of individual companies gets part of the blame for the weak showing. The other part of the blame goes to the temporary nature of the tax deal. In two years, the dividend tax rate could change again. Uncertainty is the bane of a dividend investor’s life.

Yet with all the cash available on corporate balance sheets, and no good place to spend it, the outlook for dividend hikes is promising. US consumers are not spending enough to convince companies to invest in new capacity or new hiring. Until that changes, dividend hikes and even special dividends are far more enticing to shareholders than stock buybacks.

MarketWatch notes that both US Bancorp (NYSE: USB) and Bank of New York Mellon (NYSE: BK) are among the financial sector stocks that could increase dividends in 2011. US Bancorp got bumped from the Dividend Aristocrats for 2010, as did General Electric Co. (NYSE: GE) and Pfizer, Inc. (NYSE: PFE).

Perhaps a larger problem for the Aristocrats than either uncertainty or weak performance by some companies is that as stocks move up, dividend investing looks pretty pokey and old-fashioned. There’s a lot more to be gained that a paltry 2.9%, and the risk is not too great as long as Uncle Sam keeps pumping out new dollars.

Paul Ausick