4 Recent Developments in Dividends Worth Watching

September 26, 2012 · 0 comments

Historically, dividends haven’t been very exciting for investors, but given a recent spate of new developments in the markets and the political arena, dividends are becoming pretty exciting! Here are some recent trends and investment themes to keep an eye on in the coming months:
  • Dividend Payments At Record Levels – US publicly traded companies are set to pay out a record $12 Billion in dividends in 2012 which would be an all-time record according to S&P Dow Jones Indices. This is a welcome development following the “lost decade”. Often times, stock prices follow dividend increases, so we may well continue to see the stock market rally continue as a result.
  • Dividend Tax Rates May Triple in 2013 – All eyes have been on the “fiscal cliff” which is a set of various tax breaks set to expire at the end of 2012. When you add in the increases to regular income rates on top of the Affordable Health Care act tax on dividends, they will go from their current rate of 15% taxation to about 43% in 2013 for upper income investors. Now, some argue that the free market would just push more lower income investors not subject to the higher rates into dividend stocks, but that’s not guaranteed. Most experts actually anticipate some sort of negotiated deal to fend off the impending fiscal cliff.
  • Special Dividends Skyrocket – Since there are no guarantees in politics, many companies started announcing one-time dividend payments to investors before the year is out. In many cases, these payouts exceed $10 per share! They are seeking to get these payments out to shareholders (including executives) at the lower tax rate.
  • Dividend Jealousy? Much of the current presidential campaign has been focused on Mitt Romney’s tax rate. Whether you agree with the politics or not, it raised an important question about whether the wealthy should be able to pay a lower effective tax rate by deriving income from dividends. On one hand, it looks like their effective rate is lower than many Americans that make considerably less. On the other hand, the wealthy argue that corporate profits were already taxed once as corporate taxes and then dividends are taxed again when paid out to investors, so they shouldn’t be subject to double-taxation at the higher rate. That seems like a pretty solid argument as well. But watch for changes to dividend tax rates anyway, depending on where this debate goes.

 

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