The $78 Billion Dividend Stock Question

It's one of the biggest questions facing income investors today: What does the "fiscal cliff" mean for dividend stocks? The term "fiscal cliff," coined last year by Federal Reserve Chairmen Ben Bernanke, describes more than $500 billion in automatic tax hikes, including higher dividend tax rates; and $100 billion in spending cuts, as well as a debt limit increase. If history is any guide, then your high-yield holdings should weather any dividend tax increase in the long term.

Historically, dividend stocks underperformed non-dividend payers for about six months after a dividend tax increase, according to Ned Davis Research Group. The worst of it came in the first three months after the tax increase, as non-payers gained about 50% more than payers during that time. However, longer term, dividend payers far out-performed the broader market. During the past 40 years, S&P 500 dividend payers returned an average 8.7% annually versus just 1.5% for non-dividend payers, according to Ned Davis Research. So a short-term correction could prove to be a buying opportunity.

Source: Street Authority

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