Investment Contrarians

Dividend Payments

When a company makes a profit, it can distribute some of these funds as dividend payments. Dividend payments are one of three action steps a company can take with its profits to benefit a shareholder; the other two include buying back stock and re-investing the funds in the company. When interest rates are low, many investors look to dividend payments for a source of income. One has to be careful that the dividend payments are sustainable over a long period of time.

How Dividend Paying Companies Are Helping Ahead of the Fiscal Cliff

By for Investment Contrarians | Dec 4, 2012

Dividend Paying Companies Are Helping Ahead  of the Fiscal CliffThe fiscal cliff is currently dictating the trading action in the equities market as we near December and the year-end. With 28 days left until the Bush-era tax cuts are allowed to dissipate, there is widespread fear and concern of a significant jump in taxes, including those on dividends, especially for those who invest heavily in dividend paying stocks.

The prevailing dividends tax of 15% is extremely accommodative to income-seekers, but under the fiscal cliff, we could see the tax on dividends surge to 39.6% for earners in the highest tax bracket. For dividend investors, this means a massive jump in taxes in 2013.

With the uncertainty of whether the fiscal cliff will be resolved prior to January 1, we are seeing numerous U.S. companies paying out special dividend payments to their shareholders now to avoid a potential massive tax hit for investors in the future years under the fiscal cliff.

These companies, whether or not they have historically been big dividend payers, are doing what they can to help shareholders by paying big dividend payments now under the lower taxes.

Just take a look at the numbers. In the period from the end of September to mid-November, Bloomberg says that 59 companies belonging to the Russell 3000 index announced special cash dividend payments, versus 15 companies in the same timeframe in 2011. (Source: “Special Dividends Surge Fourfold as U.S. Tax Increase Looms,” Bloomberg Businessweek, November 19, 2012.) The move to initiate special dividend payments is not a surprise, and I expect the dividend payments to continue over the next few weeks, unless a deal is struck.

Assuming the fiscal … Read More