Dividend Stocks Outperform Even in High Tax Environments

In an earlier article on why U.S. companies should raise their dividend payments now I mentioned that even if higher taxes are levied on dividends next year it is beneficial for investors to earn higher dividends if companies are unable to use their excess cash productively.

A study by Allianz Global Investors confirms that dividend stocks outperform non-dividend payers in all tax environments:

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From a recent Reuters report:

“Research from Allianz Global Investors shows it may not matter if dividend taxes return to a pre-Bush era marginal rate of up to 39.6 percent, rise to 20 percent as outlined in President Barack Obama’s 2011 budget or somewhere in between.“So, worst case scenario they expire… historically where you have had tax regimes where the highest rate was 50 percent or 70 percent, in those periods, dividend-paying stocks (still) outperformed,” said Kristina Hooper, head of portfolio strategies at Allianz in New York.

Allianz reviewed tax rates from 1972 to the present, identified nine distinct time ‘regimes’ and found dividend-paying stocks outperformed nondividend-paying stocks in all but one period.

Prior to present tax levels, in the 1997-2002 period, when dividend taxes topped out at 39.6 percent, dividend-paying shares gained 3.03 percent on an annualized basis versus a drop of 8.73 percent for nondividend-paying stocks.”

Since U.S. companies hold nearly a Trillion dollars in cash and cash equivalents, they should increase their dividend payments now despite any changes in the tax regime next year for the reason discussed above. Hence instead of worrying about tax rates for 2011 investors may be better off picking up dividend-paying stocks at decent prices.

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