TAX NEWS - 2010

Vectren CEO leads charge to preserve dividend tax rate

Carl Chapman, the new chief executive of Evansville-based utility Vectren, is going on the offensive to -- as he sees it -- defend his company's dividend.

During Vectren's annual meeting last month, Chapman warned shareholders that the 15 percent maximum federal tax rate paid on dividends was set to expire at the end of this year -- and would rise if Congress does not take action. (The rate was slashed in 2003 as part of President George W. Bush's tax cuts.)

Chapman would like to see it stay at 15 percent. But it's tough to say which way the congressional dividend pendulum may swing: Lawmakers could allow the rate to revert back to the old mark of a 39.6 percent maximum, renew it at 15 percent or place it somewhere in the middle.

It depends on, well, politics and the economy -- two pretty unpredictable things.

For Chapman, a Vectren veteran who replaced retiring CEO Niel Ellerbrook on June 1, the dividend tax rate has immediately become a top priority.

"We have paid an increasing dividend for 50 consecutive years," he said. "The dividend is very important for our shareholders."

His stance is no surprise. The dividend is a large part of the appeal in investing in utilities such as Vectren -- a stable stock that's not likely to see its share price skyrocket, but instead provides a regular dividend payment.

Vectren's current quarterly dividend of 34 cents a share gives the company an annual dividend yield of around 5.6 percent.

Chapman urged Vectren shareholders to visit defendmy dividend.org. The website describes itself as a "national grassroots advocacy campaign" seeking to get that 15 percent rate renewed.

(It's interesting to note that the list of sponsors for this "grassroots" campaign is filled with utilities and utility shareholder groups, including Vectren, NiSource and the Indiana Utility Shareholders Association.)

A higher tax on dividends could make some investors think twice before putting money into dividend stocks.

Mark Foster, chief investment officer with Columbus-based investment firm Kirr Marbach & Co., said some companies could try to reward shareholders with a special one-time dividend before the end of the year if it looks like a tax increase is on the way.

But Foster said he's also not sure a higher tax rate would necessarily keep investors away from dividend stocks.

Few lawmakers want to become known for raising taxes. But tax revenue needs to come from somewhere, given the massive amount of federal spending (which has been brought on by both parties).

Such fiscal pressures mean a renewal of that 15 percent federal rate on dividends could be unlikely.

"It's going to be difficult for Congress to take it all the way back to where it was this year," said Frank Swain, a partner at Indianapolis law firm Baker & Daniels' office in Washington, D.C.

What's more, starting in 2013, health-care reform legislation will extend a Medicare tax of 3.8 percent on investment income, including dividends -- but only for people making $200,000 a year or joint filers making $250,000.

Given his job as the CEO of a dividend-paying utility, it's easy to see why Chapman is aggressively defending the low tax rate on dividends.

And Swain makes the point that stock ownership in the United States is not just for the wealthy -- it reaches well into the middle class. "This is going to affect quite a large number of people," he said.

It's easy for people to complain about taxes and runaway government spending. Yet no one wants to give up the tax breaks or programs that benefit them. Voters get angry over increasing taxes and runaway deficits.

Whatever Congress decides to do on dividends will have an impact on investors. But it's also part of a much larger financial and economic challenge faced by our nation.