Will Tax Increases Hurt Dividend Stocks?

When legislators first enacted the Bush tax cuts in 2000, they thought they had buried the possibility of higher taxes. But the law had a hideous flaw: Without further legislative action, the old, higher tax rates would rise from the dead after 10 years. The legislation was written that way to avoid a Senate rule designed to block legislation that would significantly add to the federal deficit beyond 10 years.

Your after-tax yield could return to its current level in two ways. The first is if Wholy Moly, feeling your pain, raised its dividend enough to get the yield back up. This event is nearly as unlikely as the company itself. "Companies take the dividend rate very seriously," says Neel Kashkari, former assistant secretary to the Treasury and now head of global equities at Pimco. "The worst thing they can do is promise a dividend and then have to reduce it." All other things being equal, the most likely way to increase the yield is to reduce the stock's price.

Source: USA Today

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