Not long ago, during the late 1990s, tech stocks were all the rage and common stock dividends were regarded by many to be archaic. But sentiment changes quickly; on July 20 Microsoft announced an unprecedented onetime payout of $32 billion to shareholders, or $3 per share, and doubled its regular dividend to $0.32 per share. The company also announced plans to buy back $30 billion of its own stock over the next four years.

Why the change of heart? Many factors may have prompted this decision, but shareholders have eyed the firm’s mountain of cash for some time, and we suspect that their voices were amplified by last year’s tax change that reduced the tax on qualified dividends to 15 percent. It is also possible that Microsoft accelerated the payout (the stock goes ex-dividend November 18) through the massive onetime lump sum, rather than further increase its regular dividend, out of concern that a new administration in Washington would push for a repeal of the lower levy on dividends as early as next year.

If that is the case other firms could follow suit before year-end, perhaps after the election should a new administration prevail. Microsoft was added to the Dow in late 1999, along with Intel, Home Depot and SBC. In the October 1999 INVESTMENT GUIDE we wrote:

“Some analysts have noted that most of the recent additions to the Dow pay little in the way of dividends (Microsoft has never paid a dividend). The notion is that as older ‘smokestack’ stocks have been replaced by ‘information-based’ issues, the dividend yield somehow will become less related to total return. We believe that, 1) the recent lagging of the HYD stocks relative to the Average does not even come close to providing sufficient evidence of this, and 2) it is most unlikely that there has been a fundamental or lasting change in how the market values common stocks for the long term.”

Our commitment to the latter proposition remains firm. Notably, using mid-month prices, as of July 15, the HYD model would have outperformed Microsoft, in total return, by 14.3 percent, since Microsoft became a Dow component. The fact is investors demand a premium for assuming greater risk, and it is risky stocks, as opposed to growth stocks, that have higher than average expected returns. We have no illusions that Microsoft will become a component in our HYD model any time soon. It is certainly difficult to imagine Microsoft becoming a “distressed stock,” given what is known today. But many of the stocks that have been in our model were at one time considered “go go” growth stocks, and it would not surprise us if one day Microsoft were to enter our model.

Also in This Issue:

Quarterly Review of Investment Policy
Spontaneous Order and Investment Rules
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield