The following chart displays the relationship between net dividends paid by U.S. corporates and the U.S. stock market (Russell 3000 total market index). The stock price is determined by expected future dividends paid by a company. The stock price would rise when the investors expect higher dividends paid by the corporation. The recent rise of the U.S. stock market was caused by an increase in expectations on dividends payout because of Trump’s promise to cut corporate tax from 35% to 10%.
The following chart shows the breakdown of U.S. corporate profits from 1970 to 3rd quarter of 2016. There are three components in the U.S. corporate profits: tax on corporate incomes (Blue), net dividends (Red), and undistributed corporate profits (Green). The portion of net dividends (Red) has been gradually increasing among the three components over the time while tax on corporate incomes (Blue) and undistributed corporate profits (Green) have been declining. Because of the increase in dividends, the U.S. stock market has been able to rise although the growth rate of U.S. economy has been low. Because of reduction in corporate tax, the dividends can increase even though the corporate’s profit does not increase.