Wednesday, July 11, 2012

Be on the Lookout for One Time "Special Dividend Payments" Prior to Year End

The 'fiscal cliff" of abolishing the "Bush tax cuts" is fast approaching as 2012 winds to a close. As you may know, if that comes to pass, taxes on dividends are slated to rise dramatically, going from 15% currently to as high as 43.4% in 2013.

While that's certainly an unlikely occurrence, with our political dysfunctionality, anything could happen, of course. Thus, as the Boy Scouts put it, it's always best to "be prepared."

And besides, whenever there's one problem lurking in the shadows, there's always a potential solution nearby.

Expect 'fifth quarter' of dividend payments before tax triples says this:

"Dividend-paying companies could hand investors a bonus this year – call it a fifth-quarter payment before the tax rate on dividend income triples.

The 15% tax rate on cash dividends is set to expire at the end of 2012. Unless Congress and the president take preventive action, qualified dividends would be taxed at the former 39.6% rate, plus a new 3.8% tax for the healthcare law, for a total tax of 43.4%.

Capital gains taxes, meanwhile, are set to rise in 2013 to 23.8% from 15% — a “comparative bargain,” said Howard Silverblatt, senior index analyst at S&P Indices, in a report published Tuesday.

Many observers quite literally are banking on the hope that elected officials in Washington will keep dividend taxes from soaring, but that debate might linger into early 2013. Against this backdrop, Silverblatt makes the case for a “Q5” dividend payment before the calendar turns. That way, Silverblatt points out, investors would keep 85% of the payout instead of 56.6%, and odds are this tax tempest will be resolved by the time 2013′s second-quarter dividends are due.

“The 28.4% net difference is extremely significant to investors, while the early cash disbursement from the companies should have only a minor impact on their year-end ratios and liquidity,” Silverblatt said.

The issue is not just financial. There’s a public relations aspect too. Said Silverblatt: “As an investor, you (the company), better have a really good reason for me only getting 57 cents in January instead of 85 cents in December.”

If taxes on dividends do soar, expect companies to reduce (high-tax) dividend increases and boost (lower-tax) share buybacks.

“With so many more investors looking for income, and dividend income so high a component of retiree’s income,” Silverblatt said, “higher taxes will change the landscape.”"

My Take

To repeat, even our Congress is extremely unlikely to triple taxes on dividends in 2013.

That said, if only out of extreme caution, companies could borrow money long term at today's low rates, pay a special one time dividend prior to year end and thereby create a whole bunch of happy individual investors by so doing.

So if you own solid companies that pay good dividends now and have a reasonably strong balance sheet, which most of American companies do these days, hang on to your dividend paying stocks and see what happens as the end of the year gets closer.

We may receive a pleasant surprise before getting an unpleasant outcome. In any event, it's a possibility that I wanted to share with you.

All that said, I repeat that it's hard to envision a permanent or even temporary tripling of dividend taxation in 2013 or anytime soon thereafter.

Thanks. Bob.

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