Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Why It's Way Too Early to Count Out Putin - and Russia - 22nd Dec 14
Stock Market At Minor Top - 22nd Dec 14
UK Christmas Sales 2014 High Street Start Dates List - 22nd Dec 14
Ruble Takedown Exposes Cracks in Putin’s Defense - 20th Dec 14
Oil Drilling Our Way Into Oblivion - 20th Dec 14
Stocks Bull Market Resumes - 20th Dec 14
Gold And Silver Nothing Is Ever As It Seems And No Respite For PMs - 20th Dec 14
What Are Technical Indicators Saying About the Stock Market? - 20th Dec 14
Here’s How You Can Still Make 27% With Apple Even if You Buy Now - 20th Dec 14
Gold Stocks to Shine in 2015 - 19th Dec 14
Why Alibaba Stock Shares Are a Screaming Buy - 19th Dec 14
China, Dollar, Japan, Europe Burning Questions for 2015 - 19th Dec 14
U.S. Economy is in a Sweet Spot! - 19th Dec 14
US Dollar and the Gold Fairy Tale - 19th Dec 14
Show Me The Money (Flow)! Tracking Money-Flow Through Value Shifts In Stock Markets - 19th Dec 14
The Commodities Market Is Not Dying, It’s Just Hibernating - 19th Dec 14
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

Dividend Stocks Forecast 2013: The Road to True Wealth Starts Here

Companies / Dividends Nov 27, 2012 - 10:01 AM GMT

By: Money_Morning

Companies

Martin Hutchinson writes: If you listen to the press, Taxmageddon is going to be a "nightmare" for dividend stocks.

There's only one problem with this scary story: It isn't true.

Of course, I'll be the first one to tell you I'm not in favor of higher taxes on dividends.


And it is true that if we fall off the "fiscal cliff" taxes on dividends will revert to the full income tax rate of each individual taxpayer.

For the top taxpayers that means the top rate on dividends will rise from 15% to 43.4% if dividends become fully taxable again.

However, that's not as bad as it sounds, which is why I believe dividend stocks will remain the place to be in 2013.

Here's why.

First institutional holders of dividend stocks are taxed at their own rate so they did not benefit from the 2003 cut in dividend taxes. That means they won't suffer from a new increase.

And even among individual investors, many have their investments in IRAs or 401(k )s or other tax- deferred accounts. These holders will continue to receive dividends that won't be immediately taxed.

As for those on more modest incomes, perhaps being retired and living mostly on their dividend income, they will pay taxes only at 15%, 25% or 28%.

These are the thresholds which have been indexed for inflation since 2001, meaning the vast majority of tax payers will never get close to the 43.4% figure that makes for great scary headlines.

But it's not just all about tax rates. There are other reasons why savvy investors should continue to invest in dividend stocks in 2013.

One of them is Barack Obama...

2013 Dividend Stock Forecast
With President Obama now set to hold office for another four years, interest rates are likely to remain very low. In fact, Fed Chairman Ben Bernanke has said short-term rates will remain close to zero until the middle of 2015.

That's true even if Bernanke's current term of office ends in January 2014, since it's likely that if President Obama replaces Bernanke, his choice will be someone like Fed Vice-chairman Janet Yellen, who is equally committed to a low-rate policy.

So while we could easily see a decline driven by sluggish earnings combined with investor suspicion of the companies' accounting policies to knock prices down, dividend payers would fall much less. That's because their yields would increase and their attraction compared to bonds would become even greater.

Of course, you would need to buy solid companies which maintain their dividends, but that's a lot easier than finding the next growth stock.

For investors, that leaves two kinds of companies to look at.

One is the relatively few "dividend aristocrats" which have increased their dividends every year for the last 30, 40 or 50 years.

These provide almost completely reliable income, so any short-term price declines can be ignored. If they're in a non-financial business, they also have the advantage of providing inflation protection, as their earnings will tend to increase with prices and their dividend increases should also keep pace.

Of course, these aristocrats tend to pay only moderate dividends, in the 2.5%-4.5% range, but that's still better than you get on bonds today, and if you're living on the income you are much better protected against a burst of inflation.

An excellent Dividend Aristocrat I recommend is Emerson Electric (NYSE: EMR) which has increased its dividend every year since 1957 and yields a solid 3.4%. Its P/E ratio at 18.2 times is higher than I'd like, but that figure drops to a satisfactory 12.2 times when based off earnings in the year to September 2014.

MLPs and REITs Remain Attractive in 2013

The other type of attractive investment is a real estate investment trust (REIT) or energy-related Master Limited Partnership (MLP), which may offer a much higher yield that can also benefit from inflation, as the price of oil or real estate rises. An attractive example is Linn Energy LLC (Nasdaq:LINE), which is an oil and gas MLP with an attractive current yield of 8%.

One of the reasons why I like MLPs and REITs is that these companies do not pay tax at the corporate level. It's one of the reasons why they generally pay a higher yield.

Because the truth is my real objection to paying individual tax on dividends is that most corporate dividends are paid out of income that has already been taxed at the corporate level, thus subjecting the income to onerous rates of double taxation (triple if you include state taxes) which may easily exceed 70%.

On the other hand-- unlike MLPs and REITs-- true operating corporations generally pay lower dividends, at a maximum of 5-6% range, for two reasons.

First, dividend payout rates have generally declined, because dividends give no benefit to holders of stock options, and so are less beneficial to company management than share buybacks.

Second, the combination of low interest rates and rising stock markets in the last 3-4 years have made even traditional dividend-oriented stocks yield much less than they used to.

That' s why in my current Permanent Wealth Investor portfolio, more than half the current holdings are funds, MLPs, REITs or other structures where the dividend is passed through to the investor, because regular dividend- paying companies with high yields and sound finances are hard to come by.

So yes, dividend stock investors need to brace themselves for higher taxes. But that doesn't mean they sell.

Whatever the results of the "fiscal cliff" negotiations, dividend investors should continue pursuing these solid wealth- building strategies in 2013.

Don't let the taxes scare you, the road to true wealth still starts here.

Source :http://moneymorning.com/2012/11/27/2013-dividend-stock-forecast-the-road-to-true-wealth-starts-here/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014