Political  Calculations

Yesterday, we observed that investors have shifted their forward-looking focus in setting today's stock prices backward from the first quarter of 2013 to the fourth quarter of 2012 instead. Today, we'll explore one of the big reasons why: the looming dividend cliff. The WSJ's Jason Zweig explains (emphasis ours):

Enough about the "fiscal cliff." What about the dividend cliff?

At one second after midnight on Jan. 1, 2013, the maximum tax rate on dividends is likely to go from 15% to either 18.8% or 43.4%. The best-case scenario: Congress retains the top dividend-income tax rate of 15%, and the only increase is the scheduled 3.8% surtax on investment income for high earners. The worst case: Congress decides dividends are to be taxed at ordinary-income rates, and the highest rate jumps to 39.6%, plus the same 3.8% surtax.

That looming tax hike for dividends represents a huge incentive for shareholders to push the companies whose stock they own to increase the amount of cash dividends they pay out this year, and perhaps even to pull ahead dividends currently planned to be paid in 2013 by the end of 2012 instead. Zweig continues:

Analysts say many companies are waiting to see what Congress does before they finalize their payment plans. There are no significant tax or financial consequences for companies that speed up a dividend, analysts say.

There is some precedent for doing shareholders a favor by paying out income before it becomes taxable at a higher rate. Two years ago, when Congress also looked likely to jack up taxes on dividends, roughly two dozen companies, including Sara Lee, accelerated their January 2011 payouts into December 2010.

That time, the dividend-tax rate stayed put after a congressional reprieve. This time, a rise to at least 18.8% from 15% is all but inevitable; the odds of a tripling to 43.4% are uncertain.

Political Calculations

Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.

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