The global financial crisis of 2008-09 started in the U.S. and almost brought the world’s economies to its knees. With the downgrade of the U.S. by S&P and the crash in global markets today it appears that the U.S. might trigger another financial crisis soon if one has not started already.

I came across this graphic showing the world’s most indebted nations:

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Source:Is The World Going Bankrupt?, De Spiegel

The article notes that the world lacks the political leadership needed to end the current turmoil. This statement can’t be further from the truth especially with respect to the U.S. leadership. After the S&P downgrade, President Obama made a statement hoping that would somehow calm the markets. He even stated that “no matter what some agency may say, we’ve always been and always will be a AAA country.” However the market tanked much more after this statement underscoring the gap between market’s views of  the U.S. fiscal issues and the views held by this administration.

From A crisis of confidence in economy — and Obama by James Pethokoukis of Reuters:

In short, there is again a crisis of confidence in the U.S. economy – but in Washington, too. During his brief speech yesterday at the White House, Obama did nothing to calm jittery markets, perhaps achieving just the opposite. He blamed Tea Party Republicans for the debt downgrade. He said government discretionary spending couldn’t be cut much further. He called for raising taxes. And he repeated his demand for a mini-version of the 2009 stimulus – temporary tax cuts, infrastructure spending, more unemployment benefits.

The stock market, already falling before Obama spoke, saw selling accelerate as Obama made it clear he had no new ideas to offer. And he certainly gave no hint that he’s ready to adopt Republican ideas such as cutting business taxes or slashing regulation. Instead of a pivot, Obama stayed firmly planted in the anti-growth policies of the past two-and-a-half years. He’s even keeping Tim Geithner as Treasury secretary, practically begging the poor guy to stay. (Indeed, it was almost exactly a year ago that Geithner penned his “Welcome to the Recovery” op-ed.)

If confidence is not restored quickly and the market continues to fall the President’s hopes of winning a second-term may have to be set aside.

When investing for income with dividend stocks one has to consider the impact of taxes since higher tax rates can significantly reduce the after-tax yield on the investment. In this post lets take a look at historical trend and current tax rates on dividends.

The graphic below shows the U.S. individual dividends and capital gains tax rates from 1961 thru 2011:

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Source:  
Real Role of Dividends in Building Wealth
Michael J. Mauboussin, Legg Mason Capital Management

Dividends received by U.S. residents are assigned as either Qualified dividends or Ordinary dividends(non-qualified dividends). Ordinary dividends gets taxed at the individual tax bracket level while Qualified dividends are charged at a much lower rate based on the duration a stock is held and the status of the dividend-paying company. For example, dividends paid by REITs are considered as ordinary dividends. So though REITs have high yields, the actual after-tax yield to an investor may be much lower depending on one’s tax bracket.

The maximum tax rates for ordinary and qualified dividends will be 35% and 15% respectively thru 2012.

Source: Dividend Tax, Wikipedia

The current low tax rates on dividends are big boon to investors compared to the rates in the past. Hence investors looking to take advantage of the extremely volatility in the equity markets now can consider adding high quality dividend stocks.

Related ETFs:
iShares Dow Jones U.S. Select Dividend ETF (DVY)
PowerShares Dividend Achievers ETF (PFM)
Vanguard Dividend Appreciation ETF (VIG)
SPDR S&P Dividend ETF (SDY)

Disclosure: No Positions