Will expiration of tax cuts derail dividends?

The looming expiration of the Bush-era tax cuts could throw a wrench into some dividend-investing strategies, according to Henry Sanders, manager of the $230 million Aston/River Road Dividend All Cap Value Fund (ARDEX). While Mr. Sanders doesn't think the anticipated January dividend tax hike to ordinary income from the current 15% level should derail a commitment to dividends, he is concerned that “the tax tail might start wagging the dog.”

“We went back and looked at the [positive] impact on dividend stocks when rates were cut in 2003, and it was only about 3% to 5%, which is not that significant,” he said. However, while overall valuations of most dividend-paying stocks adjusted only slightly after dividend taxes were reduced as part of the Bush administration's tax cuts, Mr. Sanders said, the policy did spark a lot of new dividend activity. “A company's dividend policy provides tremendous insight into what management is doing,” Mr. Sanders said. “I think it would be hugely problematic if the higher taxes drove companies to start forgoing dividend payouts.”

Source: InvestmentNews

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