Many investors are getting a special dividend treat in late
2012, and while that's exciting, it's all about a changing tax
picture.
And that means some investors are going to be faced with
choices.
We generally hew to a buy, hold and rebalance sensibility here
at IndexUniverse, so I'm not going to say that all these special
dividends suggest the end is near or that dividend-focused
ETFs
ought to be avoided but, please, do be cautious and aware.
After all, tax issues are thorny, and should be taken seriously
and thoughtfully-with professional advice.
As it stands, dividends are taxed at a rate of 15 percent, but
if the U.S. were to lurch off the so-called 'fiscal cliff' at the
end of the year, the tax rate on those dividends could jump to as
much as 40 percent.
One thing seems clear:Companies are looking to throw investors a
bone by distributing many extra payouts either in the form of
'special dividends' that were not previously scheduled or by
shifting 2013 dividends into end-of-year 2012.
A total of 173 companies have announced special payouts this
month-a 140 percent jump from November 2011-according to Howard
Silverblatt, a senior index analyst at S&P Dow Jones
Indices.
To take a step back, I think dividends are already unduly
punished by the tax man, and it could get worse very soon.
As a shareholder in a company, you are a partial owner, and in
turn you own a share of the earnings that the company produces. The
company is taxed on those earnings, and if they choose to return
your earnings to you-the owner of those earnings-they are taxed
again. Good for Uncle Sam; bad for investors.
For investors who depend on dividends for cash flow, that tax
risk is material and, as I was saying, they really ought to speak
with a tax professional to formulate a new coping strategy.
The rest of us, I suppose, can enjoy the treat! The extra
dividends or early payouts are an unexpected consequence of our
dysfunctional Congress.
Don't forget though, there's no such thing as a free
lunch:Unless the economic recovery gains some serious traction,
dividend yields in general will almost certainly start shrinking in
2013. Just don't be surprised when it happens.
There is, however, some hope for dividend yields in 2013.
The Wisdom Of Dividend ETFs
If you choose to stay the course in spite of the higher taxation
rates that are almost surely coming up, know that some ETFs have
consistently delivered bountiful dividend yields.
I mention diversified portfolios of dividend-rich stocks because
it's easy to be tempted by headlines that flaunt Costco's $3
billion-$7 per share-payout.
Companies like Costco, Las Vegas Sands and Wynn Resorts all
pushed their dividend yield from the 1-3 percent range to the 6-8
percent range for the year, after accounting for all their special
dividends.
But don't be hoodwinked.
Those looking for yield are better off in a dividend-focused
ETF.
After all, several ETFs on the market produce comparable
dividend yields to individual companies, and deliver payouts more
consistently and across a broader holdings base.
State Street's SPDR S&P International Dividend ETF
(NYSEARCA:DWX), for example, has produced an outstanding average
annual dividend yield since its 2008 inception-north of 7
percent.
For those with an emerging markets appetite, the SPDR S&P
Emerging Markets Dividend ETF (NYSEARCA:EDIV) has yielded more than
6 percent over the previous 12 months.
But we needn't reach so far as emerging markets for yield. Even
a diversified basket of companies from developed countries can
produce more stable and still-impressive dividend yields.
The iShares Dow Jones International Select Dividend Index Fund
(NYSEArca:IDV), whose assets are almost entirely in developed
markets, has a dividend yield upward of 5 percent-consistently.
The point is that those companies announcing special dividends
are unlikely to make such large distributions moving forward.
So, those undeterred by taxes are better off in any of a number
of dividend-focused ETFs.
Again, that's because they consistently produce strong dividend
yields, are more diversified and draw dividends from a larger,
broader pool of securities.
The takeaway is this:Enjoy the dividends in late 2012, but don't
be the kid who opens his Christmas presents a month early only to
be disappointed in December.
There's a price to be paid for 'early' and 'special' dividends,
and that price will be in the form of inferior dividends in
2013.
And the only way to minimize this very real possibility is to
preserve as much dividend yield as possible by owning diversified
payout-focused funds.
At the time this article was written, the author had no
positions in the securities mentioned. Contact Spencer Bogart at
sbogart@indexuniverse.com.
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