Market Beat: Dividends and the proposed Obama budget
February 23, 2012
TRUCKEE, Calif. andamp;#8212; What is a dividend? A cash dividend is a payment made out to shareholders of a corporation in the form of cash. A corporation can also issue a stock dividend where the investors receive more shares of the stock.For example, if you bought stock in ATandamp;T today youandamp;#8217;d pay about $30 per share. ATandamp;T would pay you $1.76 per year as a cash dividend, and the yield on that is 5.9 percent. In todayandamp;#8217;s low interest rate environment, 5.9 percent is a respectable rate of return.A corporation that pays a dividend can increase the dividend over time or decrease it. A dividend payment is not an obligation of the corporation like an interest payment on a bond; it is optional, a method of distributing profits to shareholders. Dividends can provide for some good yields in todayandamp;#8217;s low interest rate environment.For example, McDonaldandamp;#8217;s stock has a current dividend yield of 2.80 percent, Chevron pays 3.00 percent and the dividend yield on the Dow Jones Industrial average is 2.38 percent.Dividends can be taken in cash or re-invested into more shares of the stock. The long term effect of dividend re-investment is astounding. If you look back at the long term history of the Sandamp;P 500, dividends play an important role in the total return calculation. Going all the way back to 1871, the Sandamp;P 500 has had a total return of 6.2 percent per year with dividends reinvested. The real stock price return is only 1.9 percent.President Obamaandamp;#8217;s proposed 2013 budget will have an impact on dividend investors. High income dividend investors would be hit the hardest. The current dividend tax rate is 15 percent, which is the same as the long term capital gains rate. The proposed budget would tax dividends as ordinary income which for individuals making more than $200,000 and for couples making more than $250,000 would raise the rate to a whopping 40.0 percent. The president has also proposed to raise the long term capital gains rate to 20 percent.High income dividend income investors may have to consider adjusting their strategy somewhat for the new tax rates. Another effect will likely be on the corporations that pay dividends. Companies will be more likely to retain earnings or buy back stock than to pay dividends in the future, which will have an impact on the total return of the market and make it even more challenging for income investors in this low interest rate environment.Kenneth Roberts is a Truckee based Registered Investment Advisor. Ken has been in the securities business since 1992, has worked as a branch manager for a major Wall Street firm, and is currently a portfolio manager for Fusion Asset Management. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.