By now you're probably aware of the
and what it could do to your
. But most media sources have only discussed the dividend tax
hike in platitudes rather than practical terms.
As an income investor myself, it would be nice to see an
example or two of how fiscal cliff tax hikes could affect my
dividends specifically. Since many of you are also income
investors, I figured that would be a productive exercise.
Currently, as you may or may not know, dividend income is
taxed at 15%, on average. Should the fiscal cliff tax hikes go
into full effect on January 1, those rates could rise to as high
So what does that mean in practical terms? Let's use old
Johnson & Johnson (
as an example.
Right now, JNJ pays its shareholders an annual dividend of
$2.44 per share - a yield of 3.5%. Taxed at 15%, that amounts to
a net annual dividend payment of $2.07 - or roughly nine cents
less per quarter.
Should the dividend tax rate rise to 39.6%, the net dividend
payment for a JNJ shareholder suddenly drops to just over $1.47
per share annually. That's a full dollar less per share than what
you thought you were getting as a Johnson & Johnson
Essentially, what originally was a very attractive 3.5% yield
becomes a mere 2.1% yield.
You can apply the same formula to any number of
high-yielding dividend stocks
Procter & Gamble (
would yield 1.9% instead of 3.2%.
would yield 2.1% instead of 3.5%.
would yield 3.2% instead of 5.3%.
You get the point.
The fiscal cliff will hit income investors where it hurts
most. Stocks that are currently considered "high yield" suddenly
might not seem so attractive.
Let's all hope that Congress gets a deal done soon - so that
these dividend numbers are all just theoretical.