Americans Of All Walks Of Life Own Shares In Electric Companies.
Millions of Americans own utility shares either directly or indirectly through mutual funds, life insurance policies, pension funds, and employer 401K programs. Many individual shareholders fall in the middle- income brackets and often rely, at least in part, on the dividends they receive to meet their living expenses. The typical utility shareholder is more than 65 years old and has owned utility stocks for more than 10 years. Sixty percent of these shareholders earn less than $75,000 annually.
The electric power industry continues to pay out a higher percentage of earnings than any other U.S. business sector, with a payout ratio of 61.9 percent for the year ended September 30, 2006.
Investors in electric companies greatly benefited from the Jobs and Growth Tax Reconciliation Act of 2003, which temporarily reduced to 15 percent the top individual tax rate on dividends. As a result, more companies are offering dividends—and dividends are larger. Millions of Americans—including millions of senior citizens—are receiving more dividend income. In the electric utility sector, for example, a significantly higher percentage of companies increased their dividends each year from 2004 to 2006. By 2006, 41 companies—or 64 percent of the industry— raised their dividend payments, the highest percent since 1993, when 65 percent of the industry increased their dividend payments.
The reduced dividend tax rate also has attracted additional investment in electric companies, which has increased stock prices and lowered the cost of capital (i.e., fewer new shares of stock need to be issued to raise the same amount of new capital). This lower cost of capital provides one measure of helping companies raise the billions of dollars needed for infrastructure improvements and environmental controls over the next several years (the industry’s capital expenditures in 2007 are projected to increase by more than 50 percent from their 2005 levels). These investments will help ensure a reliable supply of electricity to consumers and continued environmental improvements in the future. The 15 percent tax rate is currently extended through 2010; however, efforts are underway to further extend—or make permanent— the reduced tax rate.
Edison Electric Institute, "Dividends – Q4 2006 Financial Update," EEI Finance and Accounting Division, January 2007.