Dividend stocks have been a favorite way to generate low-tax income. However, if capital gains taxes rise from 15 to 20 percent for an important segment of the shareholder community, will companies reduce dividends in favor of equity appreciation?
At the moment, the Dow 30 stocks have an average dividend yield of 3.04 percent, with the highest AT&T (NYSE:T) yielding 5.34 percent and the lowest Bank of America (NYSE:BAC) yielding 0.69 percent. If you are a retiree with $1,000,000 invested across the Dow 30, you receive $30,400 a year in income minus 15 percent capital gains tax for a total of $25,840 in income.
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Of course, this hypothetical retiree is not likely making over $400,000. Thus, he/she would not be subject to the higher capital gains rate of 20 percent. But is that reason for celebration? NO.
Here’s Why the Fiscal Cliff Compromise May Not Protect You
Large companies take actions based on the political will of significant shareholders. These include institutional investors and the extremely wealthy. Unlike the average retiree living off fixed-income such as dividends, large shareholders are likely making greater than $400,000 or $450,000 a year. Moreover, many of them don’t necessarily need the extra cash from all their dividends. Consequently, most will prefer to play games to defer or reduce their tax burdens in the event of a tax hike.
One such game will be…