Rising Tax Rates And Dividend Stocks

I’m a big believer in income investing, a strategy that includes buying stocks that pay dividends. How will such stocks be affected if the dividend tax rate goes up in the new year? First, some history. In 2003 Congress lowered the dividend tax rate, which was supposed to be great for dividend-paying stocks. So why didn’t dividend stocks surge past everything else? Because Congress simultaneously lowered the capital gains rate, which made investing in small-caps stocks, which typically don’t pay dividends, more attractive to investors seeking capital appreciation.

This, in part, lowered the demand for dividend-paying stocks, even at their new lower tax rate. This time around we could see the opposite happen. Yes, higher dividend tax rates would seemingly hurt large-cap dividend-paying stocks. But if capital gain taxes also go up, there could be less demand for the same small-cap “growers” that did so well after 2003 — and potentially more desire for large-cap dividend payers.

Source: The Atlanta Journal-Constitution

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