Higher taxes may not hammer dividend stocks
by Matthew Craft
Associated Press Writer
November 19, 2012 12:26 AM | 621 views | 0 0 comments | 7 7 recommendations | email to a friend | print
NEW YORK — If Washington allows tax cuts to expire at the end of the year, taxes on dividends will nearly triple for the highest-paid Americans. That’s led some experts to warn of a looming collapse for popular dividend-paying stocks. When Uncle Sam charges a higher tax on something, they reason, it drives people away.

But judging by the country’s previous experience taxing dividends, that may not be how things play out.

“Historically, big changes in taxes just have no effect on dividend stocks,” says James Morrow, a fund manager at Fidelity Investments. “And our view is that you should lean on history.”

Recent studies have examined how companies in the Standard & Poor’s 500 index have fared over the past half-century when taxes on dividends change. They found dividend-paying stocks performing in seemingly unpredictable ways.

Between 1990 and 1993, for example, when dividend taxes climbed to a maximum of 39.6 percent from a maximum of 28 percent, dividend-paying stocks outperformed the broader market.

“The ‘fiscal cliff’ will be a big deal for the stock market if it’s not avoided,” says Russ Koesterich, global chief investment strategist for BlackRock’s iShares group. “But it’s probably not such a big deal for many dividend-yielding stocks.”

Tax increases and government spending cuts known collectively as the “fiscal cliff” are set to take effect Jan. 1 unless Congress and President Barack Obama reach a deal first.

Obama wants to keep the tax cuts in place, including the 15 percent dividend rate, for people making less than $200,000. Republicans want to keep the tax cuts for everyone, including the 15 percent dividend rate, but have not taken a hard line on the dividend rate publicly.

Dividend payments were taxed like everyday income, meaning taxed by increasing brackets, until 2003, when Congress passed sweeping tax cuts backed by President George W. Bush.

The 2003 cuts reduced the tax on most dividends to 15 percent.

If Obama and Congress can’t make a deal, and perhaps even if they can, dividends will be taxed like everyday income again. And the top marginal income tax rate will climb back to 39.6 percent from 35 percent, where it has stood since 2003.
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