Dodging Tax Hikes on Dividends

07/23/2012 10:00 am EST

Focus: STRATEGIES

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Income stocks may suffer if fears of a higher tax on dividends flare up, boosting tax-free municipal bonds in the process, says Mark Skousen, editor of Forecasts & Strategies.

If you’re an income investor using dividend stocks for income, you’re concerned about taxes, of course. My guest today is Mark Skousen to talk about what’s going on there. So Mark, what can we expect here in terms of taxes for dividend yields going forward?

Well, Tim, I think we’re in the golden age of income investing. I mean, I am just amazed at the incredibly high level of high dividend- paying stocks that are out there still.

The prices just haven’t gone up that much, and they continue to pay these very high dividends of 4%, 5%, 6%, even 10% in some cases. I have been recommending a number of them in Forecasts & Strategies, and I noticed that at the various investment conferences, like The MoneyShow, there’s a lot of interest, a lot of sessions on this subject. I did this luncheon and this was a hot topic.

Well, what about the possibility that dividends are currently taxed at a 15% rate. It’s the lowest level that we’ve seen in 50 years and now they’re talking about raising it to 20%, 25%, maybe 28%.

There will be some kind of a compromise, but it looks like that’s where they’re headed toward—raising the rate to get some revenues, raising the capital gains rate. This is all going to be negative for dividend-paying stocks, and I think that’s weighing on the markets right now as we’re headed toward an election—that we’re going to have problems with dividend-paying stocks.

And yet interest rates on bonds and things are so low, interest rates that you can get in the bank and money market, that even with higher taxes probably there may not be any other alternatives. Am I right there?

Well, I think that if you’re a smart investor, you’re not investing in T-bills or money market funds or even CDs. They just don’t pay any interest that’s worth considering.

You have to take a little bit of risk to earn a pretty high yield, and if you’re earning 6% or 7% or even 9% or 10% on some of these energy plays and so forth, that’s all taxable and those tax rates are going up. So that could affect the buying and selling of those positions, and people might shy away from those kinds of investments.

Alright, so what are the alternatives so I can buy them for a retirement account and put off paying those taxes and maybe wait the rates to come back down? Any other alternatives?

Well, I think annuities are another one that a lot of people look at as outside of IRAs and various 401(k) plans and that sort of thing. That’s where I recommend that you keep these income investments.

But if you’re not into that, then maybe a better alternative is the annuities, or you just end up paying the tax and dealing with it—especially if you need the income on a regular basis, which most people do.

Now, the municipals may play a role. The muni bonds and the muni bond funds may be a really good alternative, because I don’t think that’s going to be taxed.

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