Money Power: Dividends trump taxes
BY JEFFERY R. KOSNETT Money Power
Saturday, January 19, 2013
1/19/13 at 5:17 AM
America's robust dividend culture will survive despite the increase in the dividend tax rate for 2013 from 15 percent to 20 percent for high-income taxpayers - or 23.8 percent if you are subject to the Medicare surtax on investment income.
You'll still see regular quarterly checks and generous annual increases in the payments.
So if you love dividends, take a deep breath, exhale and relax.
The longer-term issue is whether higher dividend tax rates will discourage companies from making bigger distributions or investors from buying yield-oriented stocks.
On the second question, there is exhaustive evidence that investors remain loyal to high-yielding or dividend-growth stocks because generous payouts provide evidence of a secure, well-run enterprise.
As for companies' willingness to raise dividends despite higher taxes, there's plenty of evidence in the affirmative. Start with the 117 companies that initiated or restored dividends in 2011 and 2012 despite clear indications that the 15 percent rate would be up for review.
Here are some other reasons that dividends remain viable:
The influence of tax-exempt investors: Pension funds, endowments, insurance companies, and IRA and 401(k) investors collect about 75 percent of all dividends. Preferential tax rates, at whatever level, are irrelevant to them. Huge institutions, such as Calpers, the California public-employee pension fund, are saying they will shop aggressively for discounted high-dividend stocks if a tax increase sparks an irrational selloff.
Bond refugees: Until interest rates rebound, bonds "cannot cut it" as a competitor to income stocks, says Mark Freeman, a fund manager and chief investment officer of Westwood Group. If it appears that investors are starting to defect to bonds, Freeman thinks, cash-rich companies might boost dividends faster than otherwise to offset higher taxes.
Original Print Headline: Tax rise won't stall dividends
Jeffrey R. Kosnett is a senior editor at Kiplinger's Personal Finance magazine. To send him a question or comment, go to tulsaworld.com/kiplingerfeedback.