Following my article contesting the notion that people should sell dividend stocks going into the Fiscal Cliff with dividend tax rates potentially rising, the Wall Street Journal lent further credence to my argument. They made the following points which supported my argument but also supplemented it further with some insight and ideas I hadn’t considered in my prior post:
- Dividend Stocks outperformed non-dividend payers even when tax rates were higher in the past. They went on to cite various periods of time during different tax regimes where dividend paying stocks outperformed on an annualized basis.
- No alternatives for yield, especially on a risk-adjusted basis. We all know this story, with the Fed holding the Fed Funds rate at zero, all the safe investment yields are virtually zero, with the intent of pushing investors into risk assets to reflate the bubble yet again (especially leading into an election year).
- The higher tax rates would only apply to high earners (families over $250,000 per year). Most Americans are not in that bracket, so the tax changes would not have nearly the impact feared for high earners. Since the proposal (or if nothing is done) would have dividend tax rates revert to the old highest marginal rates of 39%, plus that nifty 3.8% tax to cover the so-called Affordable Care Act, puts the tax rate at almost triple the 15% currently enjoyed. As outrageous as this sounds for stocks, there would probably just be a re-shifting of asset balances from the rich out of dividend yielders and then the rest of America back into dividend yielders with a net zero impact at the end of the day. This may well open a window for investors in the bottom 95% to exploit.
- Many people hold dividend paying stocks, ETFs, mutual funds, etc. in tax-advantaged accounts (see how I beat the S&P500 with my self-directed IRA)
The bottom line is that what you might actually be looking at in late 2012 is an artifically attractive buying opportunity for dividend stocks, as opposed to a losing proposition via warmongering about dividend stocks.