Dividend Stocks Aren't Doomed

Millions of investors have made big bets on dividend stocks lately, turning to their higher-yield income streams as an alternative to thoroughly inadequate payouts from other income investments. By doing so, they've been willing to take on the risk of investing in stocks versus less volatile instruments, some of which guarantee principal repayment. But an even bigger risk looms large at the end of this year: the expiration of the low tax rates on dividends. If those provisions expire -- and it's increasingly looking like a dysfunctional government will allow them to -- could it spell the end of the three-year bull market?

A couple of years ago, when this issue first came up, I noted that despite concerns that a tax increase could hit the stock market hard, there were many reasons to think it wouldn't. That time, the government kicked the can down the road with a two-year extension of the tax cuts. It's entirely possible that the same thing will happen this time around. But there's an even better reason to stay confident about stocks this time around. In the past, when tax rates have risen, the stock market hasn't been affected. In fact, research from a SunTrust strategist discovered that returns were actually better in tax-hike years than in tax-cut years.

Source: Motley Fool

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