Taxes and dividend income

The Wall Street Journal’s Market Watch has an article about the upcoming changes in the tax law and stocks that pay dividends.  The headline: ‘Fiscal cliff’ tax hike won’t kill dividend income”

In today’s low, low interest rate environment, many investors have begun to look at stock dividends as an alternative to interest paid by bonds.

The possibility of an increase in the tax on stock dividends next year will kick up a lot of dust in the next few months about the diminished value of these payouts in that scenario — and about the threat of share prices tumbling as dividend stocks fall out of favor.

But a broader perspective is in order: Dividend-paying stocks have outperformed nondividend shares even when taxes were much higher. That suggests that any backlash now against dividend stocks could present a buying opportunity for income-oriented investors

Even if the era of low dividend taxes ends, dividend stocks should hold their appeal for several reasons.

Many dividend paying stocks beat treasury bonds, and CDs.  While stock dividends do not carry a government guarantee, and can be reduced, many companies have a record of increasing their dividends periodically, somehting that bonds and CDs never do.
A second point to consider is that while the top marginal tax rate on dividends may go up, most people are not in the top tax bracket and won’t see those increases.

Third, if you own the stocks in a tax deferred account like an IRA  you won’t be paying taxes on those dividends until you withdraw the money.  If they are held in a Roth IRA they won’t be taxed at all.

Fourth, dividends are a major part of the total return in the stock market.  A dividend is a paycheck you get for owning a stock while you wait for a stock to go up, and it cushions the loss if it declines.

Many technology stock that once rewarded investors only with capital gains have begun paying dividends as their growth rate has slowed.  In a way, dividends are a sign of maturity.

%d bloggers like this: