DIVIDENDS PAY

Back when I was a fat little kid with a sweet tooth (not that I've grown out of that phase), I knew exactly what a telco stock dividend was: It was a check from AT&T arriving four times a year that my grandmother promptly turned into an all-expense-paid trip to the dime store for her grandchildren. Ever since, I've had warm feelings when it comes to dividends, even as they became as much a relic as, well, the dime store.

Since President Bush announced his economic stimulus plan last Tuesday, financial experts and pundits have been debating the potential effectiveness of a proposal to eliminate federal taxes on corporate stock dividends, the traditional reward paid quarterly or yearly to investors. One-half of the room says it's just the thing to goose the stock market, while the other half is saying it won't make much of a difference.

Many of the latter are probably also whispering to their colleagues, “What's a dividend?” They are the ones noting that several major publicly traded firms don't offer dividends, so what's the point?

However, to anyone who has been in the telecom industry for a while, the proposed dividend tax cut is just one more confirmation that everything about the old economy is new again. Suddenly, stock dividends are being portrayed as the hot new incentive for a stock market comeback. While certain technology companies that don't pay dividends are scoffing, the telecom industry is in its element because most big telcos and major vendors never abandoned the quaint notion of dividends.

The industry can use the help, too. Corporate scandals and bankruptcies have dragged investor confidence in telecom to new lows. It's difficult at this point to connect savings from a dividend tax cut to real corporate performance metrics such as revenue, earnings and capital expenditures, but giving people a tax break can't be a bad thing. Rich investors may not need the help, but many others could use it. It could even urge telecom companies to up the frequency and size of dividend payments. That would be a strong public relations move to win back the faith of bitter investors, though such a move is no more than our wishful thinking for now.

Will tax-free dividends really boost investment in telecom and other industries? That seems iffy. A stock dividend tax break would prove positive for the telecom industry, especially in terms of investor relations, but it's important to maintain a realistic perspective of its overall effect. Creating new growth in stocks by getting investors to simply focus on a tax break will push more than a few eyes off a company's real bottom line, which, of course, is how we got into this mess in the first place.