Tom Hutchinson: I Like Dividend Stocks Even With Tax Murkiness

Wednesday, 05 Dec 2012 01:06 PM

By Forrest Jones and David Nelson

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Dividend stocks represent sound investments even though taxes applied to the asset class might rise next year, said Tom Hutchinson, editor of Newsmax’s advisory service The High Income Factor.

Dividend-paying stocks offer investors comparatively attractive yields amid today’s rock-bottom interest rates, especially relative to CDs, Treasury instruments and other fixed-income venues popular among those seeking income from their investments.

However, taxes are set to rise on investment income next year, though nobody knows by how much.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

On the one hand, a series of tax breaks are due to expire at the end of this year at the same time when automatic cuts to government spending are scheduled to kick in, a combination known as fiscal cliff that could send the country into a recession next year if Congress and the White House fail to avoid it.

On the other hand, President Barack Obama’s Affordable Care Act aims to hike taxes on investment income including dividend payments and capital gains next year as well.

Facing such uncertainty, many companies have rushed to pay dividends ahead of schedule to beat potential tax hikes.

Still, history shows that dividend stocks will do well even if taxes rise.

“I think things are overblown. Higher taxes are negative, there’s no question about that for dividends. But there’s a couple of factors that make it so I still think they are a pretty good investment,” Hutchinson tells Newsmax TV in an exclusive interview.

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“Number One, if you look historically at the performance of dividend-paying stocks versus non-dividend-paying stocks, in times of higher taxes, there really isn’t much of a correlation between higher taxes and performance,” Hutchinson adds.

“And the other thing is that in this day and age, on a relative basis, dividend stocks are huge.”

Yields in other venues are low in comparison thanks to ultra-loose monetary policies carried out by the Federal Reserve to stimulate the economy.

“The yields are paying, relative to what you are getting on Treasurys and CDs, very high,” Hutchinson says.

Even if taxes do rise, investors still need a place to put their money.

“That’s not going to go away. If you don’t like the higher taxes, what are you going to do about it?”

Taxes on dividend stocks are due to jump from current levels at 15 percent next year once fiscal cliff reforms and Obamacare taxes are finalized.

For high-income individuals, taxes on dividends could jump from 15 percent to as high as 43.4 percent, when factoring in the 3.8 percent surtax for Obamacare.

“The bottom line is their dividend taxes are going to triple,” Hutchinson notes.

In November, some 170 companies paid special dividends to beat the tax hikes, up from an average of around 70 companies that pay dividends that month, he explains, adding that some companies like Costco have taken advantage of low interest rates and borrowed money to pay dividends.

“It’s going to continue, and all the companies pushing up dividends, companies like Wal-Mart and Disney who are normally scheduled to pay in January and February, are going to pay before the end of the year.”

Many big companies these days are sitting on piles of cash so high they can pay dividends without batting an eye if they want to.

“They don’t even know what to do with all the cash they have. They can just cut the check,” Hutchinson states.

Keep an eye on companies that have taken a bruising this year like chipmaker Intel, which has suffered due to lagging PC sales, Hutchinson points out.

“The struggles may last a while but Intel is not going away. This is a great company,” he says.

“You are buying it at a very unpopular time, which is the way you do it if you have a longer-term approach. It’s paying about a 4 percent dividend here, and I think for long-term investors, it’s a great buy here.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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