CHICAGO, Nov 30 (Reuters) – With a tax increase on dividends
and capital gains looming, high-dividend paying stocks may hold
up well – even if investment income rates climb on Jan. 1.
Unless Congress acts by the end of the year, taxes on
dividends will automatically rise from the current 15 percent to
as high as 39.6 percent. While that sounds like a draconian
increase, it should not discourage investors from owning
high-dividend paying stocks nor should it trigger a lasting
You can blame inertia, but individual investors are likely
to stick with their dividend stocks anyway. And those who do may
even be rewarded for the fear factor of higher rates. Companies
like Wal-Mart have moved up dividend payments to
December. Others like Costco, Wynn Resorts and
Tyson Foods are declaring special dividends, some of
them quite substantial.
If history provides any clue, the market should get over its
anxiety quickly and move on. According to a study by Ned Davis
Research, dividend stocks performed well during past periods of
higher dividend taxes. The firm studied years when rates ranged
from 28 percent (1988-1990) to 70 percent (1972-1978).
In every period studied, except for 1987, high-dividend
stocks outperformed non-dividend payers. The margin of
outperformance was as high as nearly 15 percentage points.