The Fiscal Cliff That Wasn't

What if there was a fiscal cliff and no one fell off of it?

With stocks at their highest level in four years, some pundits, bears and politicians claim that stocks will certainly plunge if the Bush-era tax cuts are allowed to expire on January 1, 2013.

The current tax rate on dividend payments and capital gains is 15 percent. Should the tax cuts expire, dividends and capital gains could be taxed at ordinary income rates. That could be particularly troublesome for retirees who receive a sizeable amount of income from dividends. Those individuals could go from paying 15 percent to over 40 percent depending on their tax bracket.

That's what is causing some pundits to call for the end of the dividend stock bull market.

In the current low-interest-rate environment, dividend stocks have been white hot. Everyone is searching for yield, so much so that anything with even a little extra return is trading at a premium.

Nearly all preferred stocks are trading above par. Closed-end funds that generate solid yields are trading at premiums to their net asset values. And because stock prices have moved so high, it's getting harder and harder to find a quality dividend-paying stock with a yield over 4 percent.

So it's logical to assume that if an investor's taxes are going to go up by 100 percent (or more), he's going to dump the investment in favor of something more tax efficient, or investments that don't have the same amount of risk. After all, if the net (after taxes) reward is suddenly smaller, it doesn't make sense to take the same amount of risk.

Only it does.

First of all, where else is an investor going to find yield? Certainly not in treasuries. A 10-year treasury yields about 1.75 percent. The top three-year CD in the country pays 1.42 percent. A ten year municipal bond rated AA pays under 2 percent and a 10-year A rated corporate bond pays 2.8 percent.

The thing to remember about bonds is the coupon remains the same for the life of the bond. So let's say you buy $10,000 worth of an A rated corporate paying 2.8 percent. Every six months, you'll receive a payment of $140 or $280 per year.

That means this year, you'll receive $280. Next year, you'll receive $280. In five years, you'll be paid $280. And you know what you'll get in 2022? You are correct, $280.

Today, $280 on a $10,000 investment isn't horrible. In ten years it will be pathetic, even if inflation stays low. In 2012, the average inflation rate has been 2.21 percent, well below the 3.4 percent historical average.

But let's assume the next ten years are difficult and inflation stays at the same extremely low levels as today. In ten years, you'll need $12,443 to buy the same $10,000 worth of goods today.

And your 2.80 percent bond (before taxes) isn't going to cut it. You will almost definitely lose buying power over the next decade. And that's if inflation stays at these extremely low levels.

With the Fed's recent announcement of seemingly indefinite quantitative easing, most people believe inflation is going to take off.

If inflation reverts back just to the historical average of 3.4 percent, you'll need $13,970 in 2022 to buy $10,000 worth of today's goods.

The only way to keep pace with and stay ahead of inflation is with Perpetual Dividend Raisers. These are stocks that raise their dividend every year.

But, "Wait," you say. "With the fiscal cliff coming, dividend stocks are going to fall." Not so fast. It certainly seems like they should. Only, in the past they haven't.

I took a look at 104 Perpetual Dividend Raisers to see how they performed from 1985-2002, when dividends were fully taxable, and from 2003-2012, when taxes on dividends were just 15 percent. The results are surprising.

In the first, fully taxable period the average price appreciation of these stocks was 13.7 percent. In the second, the average gain for these stocks was 8.1 percent.

The discrepancy gets even larger when dividends are considered. But it's not just this special class of dividend payers that outperformed. The S&P 500 also posted more than double the average annual price appreciation during the high-tax years versus the low tax ones.

There may be other valid reasons to believe that a sell-off is coming if taxes on dividends and capital gains increase, but market history does not back up that theory.

Many believe that even this dysfunctional Congress will figure out a way to keep taxes low for at least another year, which could help dividend stocks stay lofty.

But even if they are unable to arrive at an agreement, don't rush out and sell your Perpetual Dividend Raisers just because taxes are going higher. In the long run, history tells us you'll be sorry you did.

Marc Lichtenfeld is the author of Get Rich with Dividends, A Proven System for Earning Double Digit Returns, the Associate Investment Director of the Oxford Club and the Editor of the Ultimate Income Letter.

More From US News & World Report


Get stories like this on the Yahoo app and discover more every day.
Download it now.
  • Bursa caps Teck Guan surge Business Times - 13 minutes ago

    KUALA LUMPUR: Bursa Malaysia yesterday capped the surge in Teck Guan Perdana Bhd’s share price at RM1.78 after the stock hit limit up for two consecutive days. The surge followed Teck Guan’s announcement of a solid results for the second quarter … More »

  • EPF looking at diversification Business Times - 13 minutes ago

    HONG KONG: Malaysia’s largest pension fund is looking to diversify its investment portfolios in a bid to boost returns, according to chief executive officer Datuk Shahril Ridza Ridzuan. The Employees Provident Fund (EPF) planned to invest more in … More »

  • 3 investment lessons from the House of Cards
    3 investment lessons from the House of Cards Truewealth Publishing - 17 minutes ago

    The political drama House of Cards – on Netflix at an internet connection near you – is about the fictitious rise to power in the American political system of ruthless politico Frank Underwood and his wife, Claire. Frank and Claire are fearlessly … More »

  • Sharp says to invest 57.4 billion yen in OLED business
    Sharp says to invest 57.4 billion yen in OLED business Reuters - 18 minutes ago

    TOKYO (Reuters) - Japan's Sharp Corp said on Friday it will invest 57.4 billion yen($567.81 million) in its organic light-emitting diode (OLED) business as part of a shift towards the production of displays ... … More »

  • Tokyo shares down by break on Deutsche Bank worries AFP - 27 minutes ago

    Tokyo shares fell Friday morning as Deutsche Bank's woes dented financial stocks while exporters turned down on the stronger yen. The benchmark Nikkei 225 index dropped 1.55 percent or 258.10 points to ... … More »

  • Bank Stocks Decline in Asia as Deutsche Bank Concerns Increase Bloomberg - 33 minutes ago

    Declines in Bank of Communications Co. and Mitsubishi UFJ Financial Group Inc. on Friday have put an index of Asian banks on course for its lowest close in two weeks after Bloomberg News reported about 10 hedge funds doing business with the German … More »

  • China says to remove consumption tax on non-luxury cosmetic products Reuters - 35 minutes ago

    Beijing (Reuters) - China will remove consumption tax on non-luxury cosmetic products with effect from Oct. 1, the finance ministry said on Friday. The ministry also adjusted the consumption tax on high-end ... … More »

  • United States investing in Niger air base
    United States investing in Niger air base AFP News - 44 minutes ago

    The United States is investing in a military air base capable of deploying drones in Niger's central city of Agadez, the Pentagon confirmed. The United States already has a military presence in the country's southwestern capital of Niamey, where it … More »

  • Elliott takes 8.1 percent stake in Mentor Graphics Reuters - 46 minutes ago

    Mentor Graphics is the latest technology firm the hedge fund has targeted, following successful campaigns at Qlik Technologies, Riverbed, Informatica and Compuware, which all sold to private equity firms after Elliott invested. Elliott said in a … More »

  • PBOC Seen Switching to Monetary Tightening as Soon as 2017 (1) Bloomberg - 47 minutes ago

    Seven expect the PBOC will make its next broad policy move by guiding interests in a corridor using changes to short, medium and longer-term lending facilities. Just one economist forecasts the next policy move will be a change to benchmark … More »

  • Venezuela expects non-OPEC nations like Russia to join in output cuts
    Venezuela expects non-OPEC nations like Russia to join in output cuts Reuters - 49 minutes ago

    Venezuelan President Nicolas Maduro said on Thursday he expects non-OPEC oil-producing countries, like Russia, to support OPEC's efforts to boost oil prices by reducing crude output. The Organization of the Petroleum Exporting Countries (OPEC) on … More »

  • Russia aims to keep oil output around current level after OPEC deal Reuters - 51 minutes ago

    Russia is aiming to keep its oil production at near-record levels despite OPEC's decision to modestly reduce its output, Russian Energy Minister Alexander Novak said on Thursday. Oil producers' group OPEC agreed on Wednesday to limit its output to … More »

  • Ringgit opens lower on falling oil prices Business Times - 55 minutes ago

    The ringgit opened lower against the US dollar today on the back of falling oil prices. A dealer said investors questioned if members of the Organisation of the Petroleum Exporting Countries (OPEC) would stand by the proposal to cut oil output in … More »

  • Hong Kong Stock Selloff Pares Best Quarterly Advance Since 2009 Bloomberg - 56 minutes ago

    The Hang Seng Index dropped 1.3 percent as of 10:17 a.m. local time, paring its gain since the end of June to 13 percent. Bank of Communications Co. led a measure of financial companies lower, sliding 2.8 percent. Property companies fell for a … More »

  • Hedge Funds Are China’s Newest Export as Quants Flock Abroad (1) Bloomberg - 1 hour 3 minutes ago

    Quantitative money managers from the world’s second-largest economy are opening offshore funds at a never-before-seen pace, according to Marlon Sanchez, the Asia-Pacific head of prime finance at Deutsche Bank AG. XY Investments, founded by an … More »

  • Caribbean at Keppel Bay unit selling at 2010/11 prices
    Caribbean at Keppel Bay unit selling at 2010/11 prices The Edge Property - 1 hour 9 minutes ago

    A 1,227 sq ft unit at Caribbean at Keppel Bay is on the market with a price tag of $1.8 million ($1,467 psf), according to a listing on The three-bedroom unit is situated in one of the blocks fronting the outdoor water … More »

  • Unit at Hilltops sold for $2,419 psf
    Unit at Hilltops sold for $2,419 psf The Edge Property - 1 hour 14 minutes ago

    In the prime Cairnhill Circle neighbourhood, a 1,550 sq ft, three-bedroom unit at Hilltops changed hands for $3.75 million ($2,419 psf), according to a caveat lodged on Sept 15. The unit was purchased for $5.54 million ($3,576 psf) in November … More »

  • Alarm Bells Sound in New York as Duterte’s Audit Roils Mines (1) Bloomberg - 1 hour 16 minutes ago

    The threat to shutter about three-quarters of the nation’s mines risks savaging the country’s reputation among investors, according to the head of a company whose operations face suspension. “I just came from New York, and investors are very … More »

  • Senator: Education Dept. mishandling Corinthian student debt
    Senator: Education Dept. mishandling Corinthian student debt Associated Press - 1 hour 22 minutes ago

    The Education Department is pursuing debt collection — rather than debt relief — for nearly 80,000 former students of Corinthian Colleges, despite federal and state findings that the now-defunct for-profit ... … More »

  • US-Philippines military alliance 'ironclad': Pentagon chief
    US-Philippines military alliance 'ironclad': Pentagon chief AFP News - 1 hour 23 minutes ago

    US Defense Secretary Ashton Carter said America's alliance with the Philippines remains "ironclad" even though the Asian ally's leader has vowed to end joint military exercises. The Pentagon chief's remarks came as he headed for a security summit … More »

  • China Inc. Sells Unpaid Bills to Banks as Debt Web Spreads (1) Bloomberg - 1 hour 37 minutes ago

    Resorting to a method of raising cash faster known as factoring, Sany Heavy Equipment International Holdings Co., a Chinese machinery maker, said in earnings reports that it began selling receivables at a discount. Rival Zoomlion Heavy Industry … More »

  • Global equity deals rise in third quarter but down 30 percent year-to-date - Thomson Reuters data Reuters - 1 hour 47 minutes ago

    Global equity fundraising rose in the third quarter, Thomson Reuters data showed on Friday, but failed to make up for the sharp slowdown of the first half of 2016, when volatile markets deterred listings. Bankers said a robust pipeline of deals may … More »

  • Yen Halt Near 100 Signals Japan Doesn’t Need Direct Intervention Bloomberg - 1 hour 47 minutes ago

    Japan’s currency has appreciated to within 0.1 percent of 100 three times since it last traded stronger than that level five weeks ago, then retreated. Traders say it is running into waves of sell orders every time it approaches, spurring … More »

  • Oil prices down on profit-taking after two-day jump
    Oil prices down on profit-taking after two-day jump Reuters - 1 hour 51 minutes ago

    Oil prices dropped on Friday on profit-taking, after rising 7 percent in the past two sessions, amid doubts that OPEC's first planned output cut in eight years would make a substantial dent in the global crude glut. The Organization of the … More »

  • Windfall in District 20
    Windfall in District 20 The Edge Property - 1 hour 52 minutes ago

    The bigger profit of $6.1 million accrued to a two-storey bungalow at Windsor Park Estate, which was sold for $8.6 million, or $1,203 psf on land area. Since the seller purchased the freehold property with a land area of 7,147 sq ft in June 2006 at … More »

Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
to view quotes in your portfolios.


  • Most Actives
    Most Actives
    NamePriceChange% Chg
  • % Gainers
    % Gainers
    NamePriceChange% Chg
  • % Losers
    % Losers
    NamePriceChange% Chg

Market Data

  • Currencies
    NamePriceChange% Chg
  • Commodities
    NamePriceChange% Chg
  • Bonds
    TreasuryYield (%)Yield Change