Tags: Stovall | tax | dividend | stocks

S&P Capital IQ’s Stovall: Specter of Tax Increases Depresses Dividend Stocks

By Dan Weil   |   Wednesday, 14 Nov 2012 08:16 AM

The prospect of higher taxes next year is taking a toll on dividend stocks, says Sam Stovall, chief equity strategist at S&P Capital IQ.

If the government dives off the fiscal cliff, dividend taxes will soar to 39.6 percent for people in the top tax bracket, up from 15 percent currently.

Add a 3.8 percent investment surtax to finance healthcare reform, and you have 43.4 percent of dividend taxes for the top bracket.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

“The real question is how will investors respond,” Stovall tells CNBC. “I think some of these groups [of dividend stocks] will be and have been beaten up, because a lot of these investors were riding the momentum wave for high yielders.”

The utilities, telecommunications and consumer staples industries — three of the biggest dividend payers — all have forward price-earnings ratios that exceed the market as a whole.

“Even though they normally trade at a premium to the market because of their consistent earnings and dividend growth, they do look relatively expensive,” Stovall says.

Still, their yields remain attractive, with telecoms at nearly 5 percent, utilities at 4.5 percent and consumer staples at 3 percent.

Jeremy Schwartz, director of research at WisdomTree, says tax increases shouldn’t be an issue for dividend stocks, because only half of dividends go to households that will see a tax increase — those with annual income of more than $250,000.

“I don’t think the dividend trade is overcrowded,” he tells Yahoo.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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