Wednesday, I offered some of my immediate reactions to the election as well as offered my outlook for Wall Street under President Obama. Today I want to dig deeper into a question that many of you have asked me: What’s going to happen to dividends under Obama?
And that’s a great question, because if Congress does nothing about the impending Fiscal Cliff, the first thing that will happen is that taxes on dividends will go up from 15% to 43.4%. That’s because we’ll jump to a 39.6% tax bracket as the Bush era tax cuts expire. And then there is the 3.8% Medicare tax. (To be clear, that hits single people with an income of $200,000 or more and couples with an income of $250,000 or more.)
But I don’t anticipate that dividend taxes will shoot up next year like some people are worried about.
Historically, Congress doesn’t like to work through the holidays. And with Thanksgiving just around the corner, Washington is going at full steam to get a deal worked out. I believe that Congress will raise the deficit ceiling to avert any sort of crisis and with a Republican-controlled house, I anticipate that they’ll fight hard for pro-business interests.
Of course, many businesses are playing it safe. In anticipation of the potential tax increases, we’re seeing a flood of new quarterly dividend payments before 2013. Just look at all of the companies that are going Ex-Dividend in the next week:
|Ex-Dividend Date||Company||Ticker||Payout||Yield||Payment Date|
|14-Nov||The J.M. Smucker Co.||SJM||$0.52||2.5%||3-Dec|
Even if some of this tax increases kick in, there is a silver lining. As I mentioned before, Corporate America is keeping a massive amount of cash on the sidelines. And if the tax hikes go into effect, instead of repatriating that cash through higher dividends, I expect that they’ll deploy their cash through stock buybacks. The good news is that those stock buybacks should help moderate volatility.
And in this low interest rate environment, dividends are still looking great. After all, the S&P 500 currently yields about 2.2%, and that is a heck of a lot better than you can get through most savings accounts. So I’ll keep this at the top of my radar, and I’ll let you know if Congress does anything to dividends. But I’m still optimistic that a compromise will be worked out, so it’s far too soon to begin panicking.