Editor’s Note: Because of an editing error, the original headline of this article “Fewer Companies Paying Dividends” was incorrect. It has been changed to reflect the fact that it is the rate of dividend increases that has slowed.

Are companies once again cooling to dividends?

During the third quarter, 377 of the approximately 7,000 publicly owned companies that report dividend information to Standard and Poor’s increased their dividend in 2006. This total represents a drop off from last year, when 3.6 percent of the 391 issues increased their dividend during the third quarter of 2005.

What’s more, September 2006 dividend increases declined 17.6 percent, to 89 from the 108 recorded in September of last year. The declines mark the first downturn in dividend increases since their rebirth in 2003, S&P noted in a press release.

Why the downturn, given that the Bush Administration cut the tax rate on dividends several years ago? The slowdown in dividend growth can be traced to the rapid rise in share buybacks, said S&P Senior Index Analyst Howard Silverblatt in a press release. Buybacks reduce the share count, thus increasing the earnings per share, frequently leading to a corresponding rise in the stock price.

S&P also pointed out that companies are increasingly rewarding shareholders with what it calls dividend extras, such as one-time dividend increases and special dividends. The number of dividend extras increased by 12.8 percent to 88 during the third quarter of 2006, up from the 78 recorded during the same period last year. In fact, overall dividend payments continue to rise, posting a 9 percent year-to-date gain over 2005, and a 21.3 percent gain over 2004, added S&P.