As you prepare or file your 2012 tax return, you need no
reminder that cash pays near-zero interest. Bond yields are
little better. And secondary-market bond prices will be clobbered
by eventual rate increases.
Retirees, who typically rely on investment income, feel the
pinch the most.
Instead, consider dividend-paying stocks. Many yield the same
or more than bonds. Plus their payouts can grow over time. And
their potential price gains tend to top bonds'.
The dividend yield on the S&P 500 index is around 2% now.
That's about the same as the interest yield on the 10-year
Many S&P 500 companies pay higher dividends.3M's (
) yield is 2.4%.Intel's (
) is 4.1%.
And dividends' tax benefits can help you keep more of that
cash flow. Special low rates apply to long-term capital gains and
to qualified dividends. Most stock dividends paid to investors
qualify for the bargain tax rates.
There's a 0% tax rate on dividends paid to low-bracket
taxpayers. In 2013, that rate applies to single filers with
taxable income up to $36,250. For married couples, the 0% rate
goes up to $72,500.
Those numbers are for taxable income, after deductions. A
retired couple might have total income of $85,000, $90,000 or
more, including dividends, and still pay no tax on their
If your income is over the $36,250 or $72,500 ceilings this
year, you'll probably owe 15% tax on qualified dividends. If your
taxable income is over $400,000 ($450,000 on a joint return),
you'll owe 20%.
Paying 15% or even 20% on dividend income is better than
paying tax on bond interest, which is assessed as ordinary income
at rates up to 39.6% now.
For all of these special rates (0%, 15%, 20%), retirees with
long time horizons for their investing are especially good
candidates. That's because the law is structured to exclude
in-and-out traders from this tax break.
To get the low dividend tax rates you must hold the underlying
stock for at least 61 days out of the 121--day period that began
60 days before the ex--dividend date.
The ex-dividend date is the first date on which a stock buyer
will not receive the current dividend.
Say that ABC Corp. announces it will pay a dividend to
shareholders of record as of May 3, 2013. The ex-dividend date is
So a hypothetical Ann Long buys shares of ABC on April 29, to
get that dividend. Long must hold those shares for at least 61
days in order for that dividend to qualify for the 0%, 15%, or
20% tax rate.
So dividend-paying stocks may offer generous yields, growth
potential and tax advantages. But stocks can lose value and tend
to be more volatile than bonds.
The average dividend-focused stock fund lost 9.27% in the
2000-02 bear market, Morningstar says. From late 2007 to early
2009, such funds lost 41.51%.
But dividend-paying stocks can bounce back. A $10,000
investment in dividend stock funds would have grown to nearly
$22,700 in the 10 years that ended March 26, Morningstar
calculates. That works out to an average annual return of
If Long receives $30,000 a year from Social Security, that's
equivalent to interest on $1.5 million of 10-year Treasuries,
Jim Wright, chief investment officer of Harvest Financial
Partners, Paoli, Pa., steers his retired clients to devote 20% to
75% of their portfolios to dividend stocks. His clientele