Financial services giant Citigroup (NYSE:C) will raise its quarterly dividend (payable Aug. 22) to $0.35 from $0.20 -- a whopping 75%. Using yesterday's $47.12 close and assuming the dividend sticks, Citigroup would yield 3% annually, versus 1.7% before the change. The new 15% dividend tax rate puts more of this in investors' pockets, too.

The company said in a prepared statement that, in response to the new tax law, it would now pay out in dividends capital formerly returned to shareholders through share buybacks. And return they do:

         Div'ds  Shares                    Paid  Repurch'd  Total  2002 $3,676  $5,483    $9,159   2001  3,185   3,045     6,2302000  2,654   4,066     6,7201999  1,973   3,906     5,879 1998  1,846   3,085     4,9311997  1,692   3,447     5,139
In $millions

Dividends are the better deal for shareholders where a company like Citigroup appears to buy back shares regularly and without regard to whether they represent a good investment at current prices. At the same time, Citigroup deserves at least some credit: The tax change calls the bluff of those that buy back shares primarily to offset dilution and to cover up their high stock option grants. If they don't offer dividends, their fig leaf is gone.

Citigroup joins a growing list of companies, including Bank of America (NYSE:BAC), Microsoft (NASDAQ:MSFT), and Fannie Mae (NYSE:FNM), that have declared or upped their dividends in light of the tax changes. But even with the sweetener, I'll steer clear for now. Citigroup's annual reports are mind numbing, and those off-balance sheet special purpose entities (SPEs) make me feel like Charles Munger when asked why Berkshire Hathaway (NYSE:BRK.A) sold its Freddie Mac (NYSE:FRE) shares. His reply? "We just got a little nervous."

If you own Citigroup and have been rewarded -- as have many investors -- more power to you. But whether holding on or considering buying, make sure you understand Citigroup's complex financial operations. If you don't, resist the dividend bribe.

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