If you haven’t seen it, here’s an eye opening chart from Goldman’s Alec Phillips:
Photo: Goldman Sachs
For top earners, the tax rate on dividends is going to hit 43.4% if there are no changes in the current law.
There are many layers to this whole “fiscal cliff” drama. The spending cuts are just one, but the potential hits to the economy are numerous, and this is just one example.
Ultimately, says Philips:
The most likely scenario in our view is an extension of these investment-related tax rates along with other expiring tax provisions into mid-2013, at which point broader reform legislation might be enacted. Over the longer term, the risk is clearly in the direction of higher rates on capital income, since tax rates on capital gains and dividends are at historical lows, the Obama Administration has withdrawn support for preserving preferential rates on dividend income, and a new 3.8% tax on passive income is likely to take effect for some taxpayers in 2013 regardless of what Congress decides on the “fiscal cliff.”
Meanwhile, Dan Greenhaus at BTIG, in his latest note, also touches on the dividend issue.
Companies are jacking up their dividends left and right. Both Exxon and Intel just had hikes, and of course Apple joined the ranks of the dividend payers.
But thanks to the above, the market isn’t valuing dividends as highly as they were:
While we did not touch on it specifically in today’s note regarding the fiscal cliff, dividend taxes are set to change noticeably in 2013. The tax rate is set to rise to 43.4% from just 15% this year thanks to scheduled changes in the tax code and new taxes on investment income. If we are to believe that investors value investments on an after tax basis, then high dividend paying stocks presumably get less attractive. Perhaps this is one reason that dividend paying names have trailed the broader market thus far in 2012
Greenhaus points to a version of this chart (which we made on Bloomberg.com), which compares the SPY (S&P 500 ETF) vs. the SDY (a dividend ETF).
The orange is the S&P. The green is the dividend one. You can see how they’ve both done YTD.