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Tax Debate Puts Dividend, Muni Bond ETFs in Focus

Taxes are a sticking point going into the Presidential election, and the tax debate will put income generating stocks and municipal bond exchange traded funds into focus.

With the Bush-era 15% dividend tax rate slated to expire at the end of the year, many investors are concerned that higher tax rates would significantly cut into the returns out of dividend-paying equities.

Dividends received will be taxed as ordinary income after Jan. 1 if Congress lets the Bush-era taxes expire, with a maximum 39.6% rate, plus a new 3.8% tax to pay for the healthcare reform. [Dividend ETFs, the Fiscal Cliff and Potential Tax Hikes]

While higher tax rates would lower the after-tax value on dividend assets, companies are also raising their dividend payouts. [Dividend ETFs to Reap Record Quarterly Payout]

“Companies are responsive to investor needs and have a history of raising dividends to keep investors whole, which might prevent some of the damage to this area of the market,” according to a BlackRock research note. “Currently, corporate balance sheets are in pristine shape and dividend payout ratios are at historic lows, suggesting there is ample room for companies to increase dividend payouts.” [Taxes: Muni Bond ETFs at Risk?]

Some dividend ETFs include:

  • iShares Dow Jones Select Dividend Index Fund (DVY) : 3.49% yield

  • iShares High Dividend Equity Fund (HDV) : 3.22% yield

  • SPDR S&P Dividend ETF (SDY) : 3.16% yield

  • Vanguard Dividend Appreciation ETF (VIG) : 2.08% yield

  • Vanguard High Dividend Yield Index Fund (VYM) : 2.93% yield

  • WisdomTree Dividend Top 100 Fund (DTN) : 3.60% yield

Moreover, fixed-income investors are also worried that municipal bonds may lose their federal tax-exempt status. But these rumors have been around for decades and nothing much have come out of them.

“While any such change would obviously have an impact on the markets, we do not believe significant tax overhaul that would change municipal bonds’ tax-exempt status is likely to happen,” BlackRock analysts added. “In our view, there is too much support of the current exemptions to allow for drastic changes.”

Some muni bond ETFs include:

  • iShares S&P National Municipal Bond Fund (MUB) : 1.71% 30-day SEC yield

  • SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI) : 1.71% 30-day SEC yield

  • PowerShares Insured National Municipal Bond Portfolio (PZA) : 3.06% 30-day SEC yield

  • Market Vectors Intermediate Municipal Index ETF (ITM) :

  • PIMCO Intermediate Municipal Bond Strategy Fund (MUNI) : 2.06% 30-day SEC yield

For more information on ETFs and taxes, visit our taxes category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.