The Fiscal Cliff Shouldn't Scare You From Dividend Stocks

If nothing is resolved before year-end and Congress fails to take action, dividends received will be taxed as ordinary income instead of the current maximum 15%. Ordinary income tax rates are scheduled to revert to pre-2003 levels, with a maximum of 39.6%. In addition, a new 3.8% tax will be tacked on to help pay for the Affordable Care Act. For some taxpayers, dividend taxes would nearly triple. But remember, before investors enjoyed the 2003 dividend tax breaks that put dividend taxes on par with capital gains taxes, payouts had been taxed for decades at ordinary income rates. For some, the tax was as much as 91% in the late 1950s and early 1960s, 70% in the 1970s and 50% in the early 1980s.

Despite those lofty tax rates, dividend stocks continued to maintain a prominent position in portfolios of income oriented investors, and these stocks continue to share their wealth with satisfied shareholders. So despite the threat of fiscal cliff 2013, an increase in dividend taxation is not a reason to run from dividend stocks. Besides, where do you run to? Treasuries, CDs, money markets and savings accounts yield next to nothing. With interest rates destined to stay low for a least the next couple years, there is little to no hope of better returns from these savings instruments.

Source: Money Morning

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