by Michael Tarsala
Could the fiscal cliff hit dividend stocks and retirees that depend on regular dividend checks?
The “fiscal cliff” is the combination of tax increases and spending cuts expected to take effect next year, unless Congress somehow passes new legislation by the end of the year to avoid it.
If Congress takes no action, tax rates on dividends could rise as high as 39.6%, and tax rates on capital gains would automatically rise to 20% from 15% previously, the FT reports.
A surtax for joint filers earning more than $250,000 ($200 for singles) would add an additional 3.8% surtax on investment income, and raise dividend taxes to 43.4%.
“The main risk for domestic markets and stocks remains the fiscal cliff and pending election,” says Mark Holder, manager of the Net Payout Yields investment model.
“Any inability to keep the markets calm regarding fiscal and tax issues in the US could lead to healthy losses,” according to Holder. “ The most at-risk stocks could be those of high dividend payers that have had an exceptional 18 months. These stocks might face the headwinds of higher tax rates that pushed them down at the end of 2010.”
So how do you keep from driving over the cliff?
Move to low-volatility investments, and eschew the buy-and-hold mentality, says Bill DeShurko, manager of the Dividend and Income Plus model.
“There is absolutely no reason to lose another 30-40% of your investments for the third time in the past 12 year,” DeShurko says. “Buy and hold strategies will once again wipe out wealth that individuals can no longer afford to lose.”
Photo by: Christine Matthews
