Of the many contentious issues that will frame this election year, a subject near and dear to many BetterInvesting members is the possible end of favorable tax rates for dividends at year-end. Many individual investors and clubs have been seeking yield in this age of extremely low interest rates.
Members of BetterInvesting Magazine’s Editorial Advisory and Securities Review Committee believe Washington will reach some kind of compromise regarding the rates. They also believe investors should consider the impact of higher dividend taxes on their portfolio, but they shouldn’t overthink the issue. First, whatever potential changes there would be to stock prices might already be reflected in their valuations.
Second, though one might naturally believe that a higher rate would spell doom for dividend stocks, research suggests otherwise. Nuveen Investments recently published a study finding that there’s no correlation between the performance of dividend-paying stocks and the tax treatment of dividends.
“S&P 500 stocks experienced varied performance in both the 1970s, when the top rate on qualified dividends was 70%, and after 2003, when the rate dropped to 15%,” Nuveen says. “However, keep in mind that the tax rates can affect the net return an investor may realize.”
Third, taxes are like the cliche “If you don’t like the weather in (name of wherever you live), wait 15 minutes.” They’re subject to change. So if you don’t like the current rate, wait a few years and you’ll get a new one.
So remain focused on a sound investment strategy. “Long-term investors should do the same thing they should always do — invest in high-quality, financially strong and growing companies with top-notch management teams and shareholder-friendly boards of directors,” says David Wendell Associates. Many quality companies have continued increasing dividends through markets both good and bad.
BetterInvesting is a national nonprofit organization that has been empowering individual investors since 1951. Founded in Detroit, the association (formerly known as National Association of Investors Corporation) was borne out of the conviction that anyone can become a successful long-term investor by following commonsense investing practices. BetterInvesting has helped more than 5 million people become better, more informed investors by providing webinars, in-person events, easy-to-use online tools for analyzing stocks and mutual funds, a monthly magazine and a community of volunteers and like-minded investors. For more information about BetterInvesting, visit its website at www.betterinvesting.org or call toll free (877) 275-6242.
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