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Dividend Stocks for the Fiscal Cliff

Why Dividend-Paying Stocks Will Hold Out

Written by Swagato Chakravorty
Posted December 14, 2012 at 3:09PM

Should we go over the fiscal cliff, it’ll affect nearly all of us. So if you aren’t you paying attention to dividend stocks yet, you should be.

Although taxes will likely go up on dividends, they are a sound investment, as an analysis from Forbes points out.

First, consider the market overall. Interest rates are rock-bottom everywhere, and the Fed’s most recent announcement that it will keep rates low means those numbers aren’t changing for a good while yet. By that measure, even a mere 2 percent return on dividend stocks is doing better than most things on the market, Forbes reports.

Next, consider that between 2000 and 2010, dividends constituted almost 87 percent of all the returns on the S&P 500. Now extend that another decade (1990-2010) and dividends still comprised 43 percent of all S&P 500 returns.

In other words, whether capital gains taxes are high or low, dividend paying stocks have proven themselves to be good defensive investments.

You might want to invest instead in high-yield bonds. Bad idea. It’s a turbulent market in any case, and high-yield bonds have not fared well in recent times at all.

The big problem here is high share prices, which leads to suspicions of unstable value. If you’re someone who doesn’t indulge in a lot of financial risk, then high-yield bonds are to be avoided.

On the other hand, you could make your dividends investment within your retirement accounts so as to defer any taxes on dividends. To wit, any earnings, including those from dividends, will be taxed at normal income tax rates if these are held within either a 401(k) or a traditional IRA, according to Forbes.

And if you have a Roth IRA or Roth 401(k), things look even better—earnings are tax-free provided the account has been open longer than 5 years and you withdraw after you hit 59.5 years of age.

You could even make your investments outside of retirement accounts. Even if capital gains taxes go up, they will be lower than ordinary income tax rates.

Plus, investing outside of retirement accounts means you can withdraw before specified age limits without incurring penalties. And, of course, you aren’t limited by your reasons for withdrawal(s).

And don’t forget about inflation. Dividend paying stock ETFs tend to pay out between 1-5 percent and can appreciate nicely. There are many ETFs that have averaged a total return of over 10 percent annually in just the last three years (despite the worldwide economic turmoils).  


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