Tuesday, August 28, 2012

Changing Tax Rates And Dividend Paying Stock Performance

With the looming fiscal cliff facing investors at the start of 2013, the marginal tax rate on dividends would increase to as high as 43.4% versus the current 15% rate. Investors are asking if this substantial increase will negatively impact the performance of dividend paying stocks. Copeland Capital Management recently published a white paper analyzing the impact of changing tax rates and the performance of dividend paying stocks vis-à-vis the overall market. The firm's research concluded:
  • The performance of dividend-oriented strategies...did not demonstrate any significant relationship with tax rates during years when significant changes were enacted.
  •  Corporate dividend policies also showed no relationship with changes in tax rates.
  •  The performance of dividend growth stocks appears to be more closely linked with the economic cycle than either absolute tax rates or changes in tax rates.
The below tables detail the calendar year returns during changing tax rate environments. In the second table, as tax rates declined from 2002 to 2003, the market actually outperformed the payers and growers. The research paper notes market upturns following economic downturns generally favor lower quality names as the economy begins to improve. In short, tax rates had less of an impact than the economic cycle itself.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors


Copeland White paper I: Dividends and Tax Rates (PDF)
By: David McGonigle
Copeland Capital Management
June 30, 2012

H/T:  Advisor Perspectives

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