Freaking Out Over Possible Tax Hike On Dividends – and Impact on Stocks? Don’t. We Explain

One of the bargaining chips President Obama has tossed onto the table as tax-mageddon negotiations begin with Congressional Republicans is to raise the tax rate high-income earners will pay on dividend income. Instead of today’s top dividend tax rate of 15%, households with income above $250,000 ($200,000 for individuals) would see their dividend income taxed at their ordinary income tax rate.

If other expiring Bush tax cuts vanish as well, that top marginal tax rate could rise from 35% this year, to 39.6%. Add in a new 3.8% Medicare surtax on wealthy taxpayers and for some unlucky folk the tax rate on dividends could hit 43.4%.

But even with that prospective near tripling in the dividend tax rate for some investors, it’s unlikely this proposed change in federal taxation of dividends will slow down investor interest in dividend stocks. For one simple reason:

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

And no, General Mills (GIS) is not an outlier. Plenty of household names have 3%+ dividend yields, including McDonald’s (MCD), Microsoft (MSFT), Coca-Cola (KO), Kimberly-Clark (KMB), Campbell Soup (CPB) and Johnson & Johnson (JNJ).

KO Dividend Yield Chart

KO Dividend Yield data by YCharts

Those charts explain everything you need to know about why any change in dividend taxation is unlikely to derail dividend stocks. Given the Federal Reserve’s stated intention to keep rates low through at least 2015, it’s hard to see how income-hungry investors are going to suddenly abandon dividend-paying stocks.

Besides, as YCharts previously reported, research shows that the rich folks who would be hit with the higher tax on dividends, in fact derive very little of their total wealth from dividend income. For the rest of us schlubs, the current proposals would not change the tax rate on our dividend income. Even if raising the dividend tax at lower income levels were to become a new bargaining chip, there’s a pretty easy workaround here: just keep your dividend paying stocks inside tax-deferred accounts such as your 401(k) and IRA.

Carla Fried is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



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