Demand For Dividend-Paying Stocks No Longer Only Tied To Tax Rates
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View from the Observation Deck

  1. There are currently 403 companies in the S&P 500 paying a stock dividend. That is the most since 1999.
  2. The orange shade in the chart captures a period where the federal tax rate levied on stock dividends was at the investor's ordinary tax bracket, vs. a maximum rate of 20% on long-term capital gains.
  3. With the tax rate favoring long-term capital gains over stock dividends for investors, the number of dividend-payers in the S&P 500 fell from 427 in 1997 to a low of 351 in 2002.
  4. The so-called Bush Tax Cuts revived demand for dividend-paying stocks starting in 2003 (see chart). Qualified stock dividends and long-term capital gains were both taxed at a maximum federal rate of 15%.
  5. Current income, in general, surged in popularity with retail investors due to the financial crisis-induced recession (12/07-6/09) and an overall crisis in confidence with respect to equities, in our opinion.
  6. Why are dividend-paying stocks not as influenced by tax rates today? Investors have few, if any, options to shift their capital to investments that can potentially compete on both a yield and total return basis.
  7. And even if they did, such as Treasuries or investment grade bonds, they could be subject to paying the very same ordinary income tax rates as they would have had they remained invested in dividend-paying stocks.
Posted on Tuesday, November 6, 2012 @ 4:16 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.