The American Taxpayer Relief Act of 2012 (ATRA) signed into law
on January 2, 2013, made qualified dividends a permanent part of
the tax code. But some dividend investors will get hit harder than
others. Let's analyze some of these changes.
While, taxes on qualified dividend income for most investors
will stay at 15%, individuals in the top bracket will pay 23.8% in
2013 compared to just 15% last year. (20% plus an additional 3.8%
surtax for Obamacare.) The 39.6 tax bracket applies to
individuals with income over $400,000 and income over $450,000 for
married couples.
Dividends are cash payments made by companies to shareholders.
Dividend rates are reported as certain number of cents per share.
For example, a stock or ETF with share price of $10 and a dividend
of 0.25 cents, the dividend yield would be 2.5%. (0.25% divided by
$10)
2013 Dividend Trends
Standard & Poor's expects a dividend increase of 3.6% in 2013
for stocks within the S&P 500 (NYSEARCA:IVV). The percentage of
profits repaid back to shareholders via dividends (payout ratio) is
at just 36% compared to its historical average of 52%.
Some companies have already begun increasing dividends.
Ford Motor (
F
) just doubled its quarterly dividend to 0.10 cents, upping the
yield to 3%. There have already been four dividend increases
and 18 maintains in the first week of 2013, according to Markit
Dividend Research.
In 2012, S&P 500 companies paid out a record $281.5 billion
in dividends.
Your ETF Dividends
Broadly held dividend
ETFs
like the iShares DJ Select Dividend ETF (NYSEARCA:DVY), SPDR
S&P Dividend ETF (NYSEARCA:SDY), and Vanguard Dividend
Appreciation ETF (NYSEARCA:VIG) have had increases in both share
prices and distributions. Some of these dividend increases were
because of year-end (2012) accelerated dividend payments by
companies ahead of ATRA passage.
Ordinary taxable dividends are the most common equity distributions
and are taxed at ordinary income tax rates. In contrast, "qualified
dividends" are taxed at a lower rate. Each year, your ETF provider
will report what percentage of equity dividends are ordinary versus
qualified.
Dividend Demographics
America's aging population has put income investing on the map.
One-third of all households receiving dividends are senior
households (65 and older) and nearly half of dividend income is
earned by seniors, according to the Tax Foundation.
Because ofhigher dividend tax rates on high income earners, this
segment of population should tread carefully. Adding more firepower
to your dividend strategy is a must. Beyond traditional dividend
income sources, selling covered call options can help boost cash
flow and returns. Generally, this is much safer than rotating into
higher yielding asset classes (NYSEARCA:JNK) that carry high risk
and volatility (NYSEARCA:VXX).
ETFguide's
Income Mix Portfolio
, generated $10,422 in annual income in 2012. The portfolio is
designed to generate high monthly income using covered call
options. The Jan.2013 trade garnered $654 in monthly income.
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