You know the story. If Congress fails to act by the end of the
year, then current income tax rateswill expire and rates would rise
for nearly everyone. All dividends would also be taxed asordinary
income , instead of the current 15% rate.
My opinion is thatpersonal income tax rates will stay the same
for most people. And even ifdividend tax rates rise, the overall
tax increase for most people will be small. What's more, investors
who hold stocks in a tax-deferred account like anIRA won't see any
In the meantime, all of the panic surrounding the situation
could be advantageous for income investors.
Dividend payers have been the darlings of themarket in the past
year. Historically-low interest rates and market uncertainty had
even the most aggressive investors turning to solid dividend
You can see that in the returns of many of the market's
best-known dividend payers.
is up 22% in the past year.
Philip Morris (
is also up 22%. And the
SPDR S&PDividend ETF (
-- which holds a basket of the market's steadiest dividend payers
-- is up 13%.
This is a mixed blessing for us. On one hand, we've seen
dividend payers gain as the demand for them grows. On the other
hand, the yields on these securities have dropped as the prices
A year ago, AT&T yielded 6%. Until just a few weeks ago,
thatyield fell to just 4.5% because of its soaring share price.
That's why I'm starting to get excited.
Although the market will celebrate if we avoid the fiscal cliff,
dividend stocks may not join the party. Even if a budget deal is
struck, thequalified dividend tax rate of 15% could very well rise.
If that happens, then dividend stocks may lose their fair-weather
investors -- and we could see share prices soften -- and yields
We've already seen that happen once in the past
Main Street Capital (
is abusiness development company (
) . It lends money to mid-sized companies that can't easily access
the public markets. As a business development company, Main Street
is required to pass on the bulk of its profits to investors.
However, when the market sold off a few weeks ago, Main Street
saw its price drop sharply in just a few days as fair-weather
income investors dumped the stock.
That caused thedividend yield to spike from 5.9% to 6.6% in just
days. (What's most interesting is that income from BDCs like Main
Street Capital are taxed at ordinary rates. These investors
wouldn't even be affected by increased dividendtaxes .)
Since then,shares have rebounded, providing 10% in capital
gains, along with locking in the higher yield. But Main Street is
just one example of what happened among many dividend payers.
Action to Take -->
There's noguarantee , but I believe the market will continue its
knee-jerk fiscal cliff reaction, putting more pressure on
dividend-paying securities in the short run. If and when that
happens, I want to be a buyer and putcash to work in higher yields
than I could have earned just a few months ago.