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.
Loading...

Explore Related Contents

  • Asia stocks ease, dollar steadies after Fed-led losses
    Asia stocks ease, dollar steadies after Fed-led losses Reuters - 2 hours 7 minutes ago

    By Nichola Saminather SINGAPORE (Reuters) - Asian stocks pulled back from a 19-month high on Thursday, while the dollar tried to steady from losses suffered in the wake of the U.S. Federal Reserve minutes ... … More »

  • Solar Capital meets 4Q profit forecasts Associated Press - 2 hours 22 minutes ago

    On a per-share basis, the New York-based company said it had profit of 42 cents. The results met Wall Street expectations. The average estimate of four analysts surveyed by Zacks Investment Research was ... … More »

  • SP Plus posts 4Q profit Associated Press - 2 hours 22 minutes ago

    The Chicago-based company said it had profit of 43 cents per share. Earnings, adjusted for one-time gains and costs, came to 52 cents per share. The parking facility management company posted revenue of ... … More »

  • U.S. oil rises after report shows drop in stockpiles
    U.S. oil rises after report shows drop in stockpiles Reuters - 2 hours 24 minutes ago

    TOKYO (Reuters) - U.S. oil futures rose nearly 1 percent on Thursday after data released by an industry group showed a surprise decline in U.S. crude stocks as imports fell, lending support to the view ... … More »

  • CoreLogic beats Street 4Q forecasts Associated Press - 2 hours 26 minutes ago

    On a per-share basis, the Irvine, California-based company said it had profit of 4 cents. Earnings, adjusted for one-time gains and costs, were 56 cents per share. The results exceeded Wall Street expectations. ... … More »

  • Tesla swings to loss in 4Q, says Model 3 on target
    Tesla swings to loss in 4Q, says Model 3 on target Associated Press - 2 hours 31 minutes ago

    Unable to string together profitable quarters, electric car and solar cell maker Tesla Inc. reported a loss for the last three months of 2016. Tesla posted its first profit in three years in last year's ... … More »

  • UK car production reaches nine-year high in January Reuters - 2 hours 31 minutes ago

    British car production rose by an annual 7.5 percent in January to hit its highest since 2008, as strong demand for exports compensated for a decline in demand at home, an industry body said on Thursday. Vauxhall's Ellesmere Port plant in northern … More »

  • Tokyo stocks open lower AFP - 2 hours 38 minutes ago

    Tokyo stocks opened lower Thursday as the yen strengthened against the dollar and investors contemplated the minutes from the US Federal Reserve's latest meeting. The benchmark Nikkei 225 index slipped ... … More »

  • Alleghany posts 4Q profit Associated Press - 2 hours 40 minutes ago

    The New York-based company said it had profit of $4.50 per share. Earnings, adjusted for non-recurring costs, came to $7.02 per share. The property and casualty insurance provider posted revenue of $1.46 ... … More »

  • Top banks' commodities revenue drops 7 percent in 2016 - survey
    Top banks' commodities revenue drops 7 percent in 2016 - survey Reuters - 2 hours 44 minutes ago

    LONDON (Reuters) - Commodities-related revenue at the 12 biggest investment banks fell by 7 percent last year, mainly due to weakness in the oil sector, a report by financial industry analytics firm Coalition ... … More »

  • Lower fares hit Qantas first half profit
    Lower fares hit Qantas first half profit AFP News - 2 hours 49 minutes ago

    Australian carrier Qantas Airways posted Thursday a 7.5 percent hit to first half earnings, impacted by lower fares, greater competition and empty seats. Underlying profit before tax fell to Aus$852 million (US$656 million) for the six months … More »

  • Fitbit reports 4Q loss Associated Press - 2 hours 50 minutes ago

    On a per-share basis, the San Francisco-based company said it had a loss of 65 cents. Losses, adjusted for one-time gains and costs, came to 56 cents per share. The results did not meet Wall Street expectations. ... … More »

  • Lower fares hit Qantas first half profit AFP - 2 hours 51 minutes ago

    Australian carrier Qantas Airways posted Thursday a 7.5 percent hit to first half earnings, impacted by lower fares, greater competition and empty seats. Underlying profit before tax fell to Aus$852 million ... … More »

  • Air NZ flies into turbulence as competition heats up
    Air NZ flies into turbulence as competition heats up AFP News - 2 hours 53 minutes ago

    Air New Zealand reported a 24 percent fall in interim net profit Thursday amid increased competition in the domestic aviation market. New Zealand's flag carrier said net profit for the six months to December 31 was NZ$256 million (US$184 million), … More »

  • 3 Reasons Why You Should Consider Buying Gold Now
    3 Reasons Why You Should Consider Buying Gold Now ValuePenguin - 2 hours 56 minutes ago

    This is because gold is perceived as an "alternate" currency whose value does not depreciate along with your ordinary paper money. While commodities as a whole have faced a bear market in recent years — the Bloomberg Commodity Index, which tracks … More »

  • The good times are back for copper. Here’s why
    The good times are back for copper. Here’s why Truewealth Publishing - 2 hours 56 minutes ago

    Not long ago, Dr. Copper was sick. Today the doctor is looking a lot healthier. It’s been a rough few years for copper. Since hitting all-time highs of US$10,250/metric tonne in February 2011, it has suffered nearly 6 years of tumbling prices. As … More »

  • OPEC Still Waiting for Evidence Oil Cuts Are Doing Their Job Bloomberg - 2 hours 56 minutes ago

    A reduction in the amount of oil held in storage around the world is the most important factor for the Organization of Petroleum Exporting Countries, Qatar’s Energy Minister Mohammed Al Sada said at the IP Week conference in London Wednesday. The … More »

  • Nissan appoints Hiroto Saikawa as CEO Reuters - 3 hours ago

    (Reuters) - Nissan Motor Co Ltd said on Wednesday it has appointed the company's co-chief executive officer, Hiroto Saikawa, as Nissan's chief executive, effective April 1. Carlos Ghosn, chairman of the ... … More »

  • Tesla Stays Steady With Model 3 as Musk Loses Latest Executive Bloomberg - 3 hours ago

    The Model 3 sedan, Tesla’s cheapest plug-in vehicle yet, remains on track to arrive in July, and production of the car should reach about 5,000 units by the end of the year, according to a letter to shareholders Wednesday related to the company’s … More »

  • Tredegar posts 4Q profit Associated Press - 3 hours ago

    On a per-share basis, the Richmond, Virginia-based company said it had net income of 5 cents. Earnings, adjusted for non-recurring costs, were 10 cents per share. The plastic films maker posted revenue ... … More »

  • Ansys beats Street 4Q forecasts Associated Press - 3 hours ago

    The Canonsburg, Pennsylvania-based company said it had profit of 80 cents per share. Earnings, adjusted for one-time gains and costs, came to 98 cents per share. The results topped Wall Street expectations. ... … More »

  • Cenveo reports 4Q loss Associated Press - 3 hours ago

    The Stamford, Connecticut-based company said it had a loss of 3 cents per share. Earnings, adjusted for one-time gains and costs, were 3 cents per share. The printing and packaging company posted revenue ... … More »

  • Global stocks fade from record highs, dollar falls on Fed minutes
    Global stocks fade from record highs, dollar falls on Fed minutes Reuters - 3 hours ago

    By Richard Leong NEW YORK (Reuters) - Global stocks pulled back from record highs on Wednesday while the dollar declined after minutes from the U.S. Federal Reserve offered little to support the notion ... … More »

  • Tesla has finished its investigation into Fremont plant working conditions and will release findings soon
    Tesla has finished its investigation into Fremont plant working conditions and will release findings soon Business Insider - 3 hours ago

    Scott Olson/Getty Images Elon Musk. Tesla CEO Elon … Continued The post Tesla has finished its investigation into Fremont plant working conditions and will release findings soon appeared first on Business Insider. … More »

  • Activist Glaucus Travels 10,000 Miles to Find Next Big Short (1)
    Activist Glaucus Travels 10,000 Miles to Find Next Big Short (1) Bloomberg - 3 hours ago

    The co-founder of Glaucus Research Group flew more than 10,000 miles (16,090 kilometers) from his base in Austin, Texas, to Australia, where he’s looking at companies including commodity producers. From his new firm in London, former Goldman Sachs … 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.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.260.00+1.96%
    N21.SI
    1.02+0.04+4.08%
    G13.SI
    1.73+0.20+12.70%
    S51.SI
    0.20-0.02-9.09%
    SK3.SI
    0.375+0.015+4.17%
    5ME.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.35+0.07+27.27%
    BQF.SI
    0.13+0.02+17.12%
    UV1.SI
    0.53+0.07+15.22%
    BLR.SI
    0.168+0.020+13.51%
    5PD.SI
    1.73+0.20+12.70%
    S51.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.13-0.05-27.37%
    AZR.SI
    0.40-0.08-16.67%
    BLA.SI
    0.094-0.014-12.96%
    5DL.SI
    0.179-0.020-10.05%
    BDN.SI
    0.20-0.02-9.09%
    SK3.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.4153+0.0021+0.15%
    USDSGD=X
    1.4939+0.0024+0.16%
    EURSGD=X
    1.7609+0.0009+0.05%
    GBPSGD=X
    80.0050-0.165-0.21%
    SGDJPY=X
    5.4804-0.0097-0.18%
    SGDHKD=X
    3.1425-0.0083-0.26%
    SGDMYR=X
    9,472.0908-16.7539-0.18%
    SGDIDR=X
    4.8590-0.0066-0.14%
    SGDCNY=X
    1.0871-0.0007-0.06%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,237.80+4.50+0.36%
    GCJ17.CMX
    17.99+0.03+0.19%
    SIH17.CMX
    89.91-1.82-1.99%
    ^XAU
    2.72-0.01-0.51%
    HGH17.CMX
    54.08+0.49+0.91%
    CLJ17.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.910.00
    ^FVX
    2.42-0.01
    ^TNX
    3.040.00
    ^TYX