Dividend investing and the 'Fiscal Cliff'

‘Fiscal cliff’ tax hike won’t kill dividend income

Excerpts:

Unless Congress acts before year-end, dividends received from Jan. 1 onward will be taxed as ordinary income, instead of the current maximum 15% tax. And ordinary-income tax rates are scheduled to return to pre-2003 levels, with a maximum of 39.6% — plus a new 3.8% tax to help cover the Affordable Care Act, for a total of 43.4%. So dividend taxes would nearly triple for some taxpayers. ...

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

For starters, what beats stock dividends in today’s yield-hungry climate? Treasury bonds? Bank certificates of deposit?

No way, said Howard Silverblatt, senior index analyst at S&P/Dow Jones Indices LLC, a McGraw-Hill Cos. unit. “Where are you going to put that money?” he asked. “Competitively, I don’t see what’s going to take dividends’ place. On a risk-reward basis, these are still attractive rates.”

The S&P 500 Index yielded 2.25% at the end of August, more than half a percentage point above the 10-year Treasury note. If next year the income from dividends and Treasurys is taxed equally, stocks still keep their edge and offer potential for share-price appreciation.

“Income is very low and hard to come by,” said Daniel Peris, co-manager of Federated Strategic Value Dividend (SVAAX) , which focuses on companies with dividend-growth potential. “A dividend-focused strategy, even on a higher-tax basis, still compares favorably to the alternatives.”

Comment: Fiscal cliff defined (Google it ... there are a lot of articles):

The United States fiscal cliff refers to a predicted significant reduction in the budget deficit and corresponding slowing of the economy if specific laws are allowed to automatically expire or go into effect at the end of 2012.These include tax increases due to the expiration of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and the spending reductions ("sequestrations") under the Budget Control Act of 2011.

Final comments: I expect that congress will act after the November elections. Image is Wiley Coyote