Saturday, November 20, 2010

Higher Tax Rates And Performance Of Dividend Payers Versus Non Payers

As the end of 2010 is fast approaching, it appears Congress is having difficulty deciding how to handle the expiration of the Bush era tax cuts. If the Bush era tax structure expires, a whole host of tax increases will be thrust upon nearly all tax payers. One tax that will be impacted is the tax rate on dividends will increase.

From a performance perspective, higher taxes on dividends does not necessarily translate into the stocks of dividend payers underperforming the non payers. A recent Reuters article, Tax Changes Won't Kill Dividend Trend, highlights where Allianz reviewed tax rates from 1972 to the present, identified nine distinct time 'regimes', and found dividend-paying stocks outperformed nondividend-paying stocks in all but one period: 1987 (see below chart.)

From The Blog of HORAN Capital Advisors

If tax rates do increase, the current high level of cash on corporate balance sheets could lead these firms to institute special dividends before year end.

From The Blog of HORAN Capital Advisors
Source: PIMCO

Wynn Resorts (WYNN) recently announced an $8 per share special dividend and Progressive Corp. (PGR) announced a $1 per share special dividend. More firms may follow this lead before the end of 2010.

Given the fact firms that have consistently paid a growing dividend tend to exhibit strong fundamentals, if a higher dividend tax rate is realized, the performance of these firms is still likely to be good. The current low rates on fixed income investments is also making dividend paying stocks look attractive on a relative basis.

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