Taxes and Dividends

An interesting tidbit crossed our desk the other day related to dividends, which is a topic many clients have been interested in with income from bond holdings at fairly meager levels. Morningstar reports that “342 of the S&P 500 companies increased their dividends (in 2011), while only five cut their dividends, leading to a net annual increase in payout of $41.1 billion, a far cry from the $37.3 billion in dividend cuts created by this group in 2009.” The Morningstar author goes on to posit that he expects healthy dividend increases in 2012 as well. In our view, that may well turn out to be the case in 2012. However, President Obama has proposed some pretty hefty increases in taxes on dividends, to the tune of up to 44.8% in the top tax bracket compared to today’s 15% (calculation by the WSJ). That tax increase, if it comes to fruition, may pose a headwind for increased corporate payouts. We know that when tax rates on dividends were cut in the past, dividend payouts went up as corporations recognized a preference for dividends over share buybacks from many in their shareholder base. It seems reasonable to postulate that a dividend tax over 40% could cause the reverse behavior. Stay tuned.