What About The Dividend Cliff?

Enough about the "fiscal cliff." What about the dividend cliff? At one second after midnight on Jan. 1, 2013, the maximum tax rate on dividends is likely to go from 15% to either 18.8% or 43.4%. The best-case scenario: Congress retains the top dividend-income tax rate of 15%, and the only increase is the scheduled 3.8% surtax on investment income for high earners. The worst case: Congress decides dividends are to be taxed at ordinary-income rates, and the highest rate jumps to 39.6%, plus the same 3.8% surtax.

Even if tax rates do triple, investors still would be better off with bigger payouts. History also shows that high-dividend-paying companies outperform dividend misers. More than seven decades ago, in his classic book "Security Analysis," the great investor Benjamin Graham made a call so radical that it still sounds shocking today. Complaining of the "despotic powers" wielded over dividend policy by corporate executives and directors, Graham argued that companies should no longer be allowed to direct surplus cash away from paying dividends—even for reinvesting in the business—without first obtaining formal "consideration and appraisal" from their investors, most likely through a vote at the annual meeting.

Source: Wall Street Jounal

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