Dividend Stocks For An Uncertain Tax Policy

Now, as President Obama heads into his second term, there's much talk in Washington about the expiration of the Bush-era tax cuts and other policy changes that could make dividend paying stocks far less attractive. Much depends on what sort of debt and tax reform deal Congress and the White House come up with. As things stand now, if taxes rise as planned at the end of 2012, folks in the top marginal income tax bracket could see the tax on their dividend payments more than double - from the current 15% to 39.6%. All things being equal, dividend paying stocks would become far less attractive and offer less alluring returns.

But not so, says James Morrow, the portfolio manager of Fidelity Equity-Income Fund. For starters, Morrow and his team delved into the historical data and could find no meaningful correlation between changes in dividend tax rates and the performance of dividend paying stocks. That was even true back in 2003 when the dividend tax rate fell by more than half to 15%. Morrow therefore also sees demand for dividend paying stocks holding up just fine even if taxes eat into return. For one thing, as he points out, 34.4% of investors' equity assets sit in tax-advantaged accounts such as IRAs and 401(k)s.

Source: iStockAnalyst

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