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MarketWatch: Higher Taxes Won’t Kill Dividend Stocks

By    |   Thursday, 06 September 2012 06:55 AM

Some investors are worried that the tax increases currently scheduled to begin next year would take the starch out of dividend stocks. But fear not, says MarketWatch.com columnist Jonathan Burton. Dividend stocks would still make a wise investment.

On the tax front, if Congress doesn’t act before year-end, dividends will be taxed as ordinary income, compared with a 15 percent rate currently. Top taxpayers would have a 39.6 percent ordinary income tax rate.

Add a 3.8 percent investment income tax to help pay for healthcare reform, and you have a top dividend tax rate of 43.4 percent.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

But if dividend stocks maintain their historical outperformance, that can make up for the tax hike. From the end of 1979 through July, dividend stocks in the Standard & Poor’s 500 Index generated an annualized total return of 12.1 percent, compared with a 10.7 percent return for non-dividend stocks, according to S&P Capital IQ data.

And if you hold dividend stocks in a retirement account, you don’t have to worry about any taxes until you withdraw the money. “If the bulk of your retirement funds are in tax-deferred accounts, don’t worry,” Morningstar analyst Josh Peters tells MarketWatch.

For income investors, dividend stocks offer payouts far superior to 10-year Treasury notes and certificates of deposit. And the S&P 500 yielded only 2.25 percent as of Aug. 31.

“Competitively, I don’t see what’s going to take dividends’ place,” Howard Silverblatt, senior index analyst at S&P, tells MarketWatch. “[T]hese are still attractive rates.”

And many dividend stocks have a good shot at capital gains.

While you can easily fill up your dividend stock portfolio with blue-chip U.S. companies, some foreign stocks offer the possibility of juicy dividends and capital appreciation too.

Ernie Cecilia, chief investment officer of Bryn Mawr Trust in Bryn Mawr, Pa., tells SmartMoney that he’s bullish on Anglo-Dutch consumer goods titan Unilever PLC (UL). It has a yield of 3.3 percent.

While the European economy remains weak, Asia and Africa account for 41 percent of the company’s revenue.

Matt Ballew, chairman of Security Ballew Wealth Management in Jackson, Miss., is looking to buy shares of Daimler (DDAIF) if they tumble further on eurozone woes, SmartMoney reports. Daimler yields 5.9 percent.

Its biggest sources of revenue are Asia, the United States and Germany, Europe’s strongest economy. So again it’s well positioned to withstand eurozone turmoil.

With traditional dividend stocks, such as utilities, trading at lofty levels, you might consider technology stocks.

They now account for 13.8 percent of S&P 500 dividends, up from less than 6 percent in 2007, according to The New York Times.

Several blue-chip tech stocks offer attractive yields, including Intel (INTC) at 3.6 percent, Microsoft (MSFT) at 2.6 percent and Cisco (CSCO) at 2.9 percent. Even Apple (AAPL) now pays a dividend, though it yields only 1.6 percent.

So if taxes do rise and dividend stocks fall, you might consider scooping some of them up.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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