Sometimes a bit of uncertainty can be a good thing.
For investors, one of the most pressing questions is whether the coming presidential election and the pending expiration of Bush-era tax cuts will result in higher dividend taxes. Unless Congress reaches a deal by the end of the year, dividend taxes will rise to 43.4% from 15%. But some stock pickers are finding a silver lining, at least for now.
A number of companies are seeking to get ahead of the tax increases by paying out big special dividends before Dec. 31. In the past two weeks, at least four Standard & Poor’s 500 companies have announced special payouts.
Congress has until Dec. 31 to strike a deal on a bundle of tax cuts and spending programs that are scheduled to expire, creating what has become known as the “fiscal cliff.”
Whether or not they succeed will depend in part on how the election plays out. Many investors expect the government to be split between the two major political parties after the Nov. 6 election, a scenario that does little to guarantee an outcome either way.
Congress’s machinations on taxes likely will have broad repercussions for the stock market.
Companies in the S&P 500 index on average pay a dividend yield of 2.1% before tax, according to Goldman, meaning investors receive annual dividends roughly equivalent to 2.1% of stocks’ current share prices. With the current tax rate of 15%, the yield falls to about 1.8%, roughly in line with the yield on the 10-year Treasury bond, which settled Friday at 1.756%.
If Congress doesn’t strike a deal to keep the current tax regime, that after-tax dividend yield would fall to 1.2%, making companies that pay large dividends, such as utilities, less attractive to investors.
Source: The Wall Street Journal