A $7.8 Trillion Investor Class Will Keep Higher Taxes From Crushing Stocks

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Photo: Flickr / thebrooklinelibrary

If Congress takes no action, the tax on dividend income will jump from 15% to 43.4% in 2013.

This has investors and some analysts freaked out that dividend stocks will collapsed before the year’s over.

But, Wisdomtree’s research team thinks that these fears may be overblown.

Barron’s Brendan Conway tweeted this recently released report, the team believes that investors that are shielded from taxes — like retirement funds — are likely to take advantage in the event of a dividend stock sell-off. From Wisdomtree:

We believe that if there is a large sell-­‐off in the prices of dividend-­‐paying equities because tax-­‐sensitive investors decide to sell their stocks, these Retirement Investors, as well as those represented by nonprofits, endowments and annuities, are likely to become motivated to take advantage of the potentially reduced prices of these assets.

“When one aggregates these pools of assets, we estimate there are over $7.8 trillion of equity assets held by Retirement Investors that are not tax sensitive,” they write.

Retirement accounts like IRAs do not pay taxes on dividends as they are earned; rather, taxes are deferred until retirement benefits start to be paid out.

That means that as counterintuitive as it appears on the surface, an increase on dividend tax rates could potentially benefit the millions of Americans who hold high-yield dividend stocks in their IRAs and are able to buy into a potential sell without being impacted by the rising tax rate.

Here are other points to their rationale that higher taxes won’t kill stocks:

  • Dividend taxes will probably not be raised across the board, but only on those who earn over $250,000;
  • Over the past 30 years, firms have been paying a lower percentage of their earnings as dividends, so the hit should be limited;
  • Dividend stocks performed quite well after the last dividend tax increase in 1993; and
  • Dividend-paying stocks still offer superior returns than corporate and U.S. government bonds.

You can download the report here.

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