In President Obama’s 2013 budget, he recommended letting dividend taxes climb to 39.6% for individuals who earn more than $200,000 a year and couples making $250,000 or more.
This doesn’t include a 3.8 percent investment tax surcharge for ObamaCare, putting the max tax-rate at nearly 45%. That’s tripling the current top rate of 15%. Clearly, such a move would make dividend less attractive for investors and public companies alike.
While most who make less than the minimum income requirements might think “so what, it doesn’t affect me”, it probably will. Here is why. Publicly trading companies have a duty to put the interest of shareholders first. Distributions that can be taxed at 45% are an inefficient use of excess capital.
The reason is that investors who qualify for the higher rate will seek alternatives to dividend paying stocks. Except for stocks like Apple, most dividend payers are mature companies with low growth rates and margins. In fact, Steve Jobs didn’t want to pay a dividend because he felt the Apple could make better use of its money than paying it out to shareholders.
Dividends are offered to make total returns competitive with high flying earnings growers. Cut the net dividend in half for a large band of investors, and 8% earnings growth isn’t as attractive. Many insiders fear that if the tax-hike comes to pass, a mass selling wave will hit dividend payers. Obviously, corrections hit all shareholders regardless of income.
So what can investors expect in the event 2013 comes and the current 15% tax rate goes? In all likelihood, companies will slow down dividend increases or leave them as is. Top Equity News suspects that many could suspend their dividends and use the money for share buybacks and/or acquisitions. Both of which would enhance shareholder value without adding to shareholders tax bills.
For dividend investors, this is a situation worth watching. TEN will be keeping an eye on it too. So keep it here, should any major developments occur on the dividend front, we will let you know.
Are Dividends About to Go the Way of the Dinosaur? is an article from: 
