If corporate profits keep lagging the way they have in the past few months, many Wall Street analysts say they will soon slow the rapid growth of dividends.
Spurred on by the earnings boom of 1988 and early 1989, dividend payments by the 500 companies in Standard & Poor's 500-stock composite index are expected to show an increase of 13 percent this year.That would rank as by far the strongest showing of this decade, just about tripling the current rate of inflation.
But in 1990, S&P analysts project that the rate of dividend increases will drop back to the 5 percent to 6 percent range.
"Dividend hikes, a strongly supportive market influence this year, will be less of a factor next year," S&P said in its weekly publication The Outlook.
For much of the 1980s, dividends have been consigned to a supporting role in the story of the market's ups and downs. Capital gains have been the dominant theme in a bull market where prices of many stocks chalked up gains of 200 percent, 300 percent or more.
Companies that found themselves with buildups of cash they could have devoted to dividend increases often opted for a different course - using the money to buy back chunks of their stock.
But the crash of 1987 and this year's October massacre have apparently helped inspire a revival of enthusiasm for dividends as a sort of stabilizing influence in periods of uncertainty.
In the weeks immediately following the 190-point drop of the Dow Jones industrial average on Oct. 13 of this year, dividend-paying stocks outperformed those without dividends by close to 2 to 1, according to Joseph Barthel, analyst at Hopper Soliday & Co.
Dividends have always mattered to long-term investors hoping to benefit from rising income (and hence inflation protection) on their investment, or from participation in dividend reinvestment plans for growth.
Furthermore, dividends have gained a new status in the past couple of years since tax reform did away with special breaks for long-term capital gains, leaving both types of income subject to the same tax rates.
The trend in dividends, of course, is always heavily dependent on which way corporate profits are headed.
Lately, many Wall Street estimates of 1990 earnings have been cut back after a disappointing crop of reports for this year's third quarter and early indications that the fourth quarter will also be weak.
But analysts' opinions remain sharply divided over how long and how severe the earnings slump will be.
Michael Sherman, investment strategist at Shearson Lehman Hutton Inc., contends that it probably will have run its course by the middle of next year.
"We still expect profits to resume an upward path in the second half of 1990 as inflation continues to subside, short-term interest rates decline, and money supply growth, which has returned to an expansionary level, makes itself felt in aggregate demand," Sherman says.
On that score, analysts say, lower interest rates would be helpful for the market outlook in a couple of important ways.
First of all, they would stand to bolster prospects for earnings and dividends by stimulating business activity. Secondly, they would make dividend yields of stocks more attractive by comparison with returns available on interest-bearing investments.