Everywhere you turn these days it seems that dividends are making the news. Companies are declaring them and raising them, yield-hungry investors are clamoring for them, and all the while politicians are eying them like never before as fat targets for new taxes. Yes, the lowly little dividend has found itself at the center of the fiscal cliff battle. So for this installment of Investing 101, we take a look at how potential policy changes might affect your portfolio.
The backdrop for this renewed attention is, of course, the country's dire fiscal outlook and President Obama's proposal to raise taxes to close the gap. As Jeremy Schwartz, director of research at WisdomTree Investments (WETF), points out in the attached video, on January 1 a decade of preferential 15% tax rates is set to end, rising to 20% for capital gains, while dividends would be taxed as ordinary income again.
"Since the President enacted a 0.9% Medicare payroll tax, plus another 3.8% to fund Obamacare," Schwartz says, "the highest tax on dividends is set to go up to 43% under that scenario for the highest income earners."
Conventional wisdom suggests that nearly tripling the top tax rate for dividends would lower after-tax returns, thus reducing the overall demand for dividend-paying stocks. However, Schwartz says there "are number of mitigating factors" that would reduce the actual impact — namely the fact that nearly 50% of dividend-paying stocks are held in s0-called "tax insensitive accounts," such as IRAs, pension funds, endowments and non-profits. He also thinks that any sell-off in these stocks would likely be short-lived, as it "could motivate these investors" to scoop up bargains.Read More »from What the Fiscal Cliff Means for Your Dividend Stocks