Higher taxes may not slash dividend-paying stocks
NEW YORK — If Washington allows tax cuts to expire at the end of the year, taxes on dividends will nearly triple for the highest-paid Americans.
That's led some experts to warn of a looming collapse for popular dividend-paying stocks. When Uncle Sam charges a higher tax on something, they reason, it drives people away.
But judging by the country's previous experience taxing dividends, that may not be how things play out.
“Historically, big changes in taxes just have no effect on dividend stocks,” said James Morrow, a fund manager at Fidelity Investments. “And our view is that you should lean on history.”
Recent studies have examined how companies in the Standard & Poor's 500 index have fared over the past half-century when taxes on dividends change. They found dividend-paying stocks performing in seemingly unpredictable ways.
Between 1990 and 1993, for example, when dividend taxes climbed to a maximum of 39.6 percent from a maximum of 28 percent, dividend-paying stocks outperformed the broader market.
“The ‘fiscal cliff' will be a big deal for the stock market if it's not avoided,” said Russ Koesterich, global chief investment strategist for BlackRock's iShares group. “But it's probably not such a big deal for many dividend-yielding stocks.”
Tax increases and government spending cuts known collectively as the “fiscal cliff” are set to take effect on Jan. 1 unless Congress and President Obama reach a deal first.
Obama wants to keep the tax cuts in place, including the 15 percent dividend rate, for people making less than $200,000.
Republicans want to keep the tax cuts for everyone, including the 15 percent dividend rate, but have not taken a hard line on the dividend rate publicly.