Financial Focus: Dividends Still Worth Pursuing if Tax Laws Change
Dividends Still Worth Pursuing if Tax Laws Change
Tax laws change all the time - and these changes can have a big impact on your investments. But if you have some inkling of these changes in advance, you may be able to make decisions that can help you stay on track toward achieving your financial goals. Such is the case with dividend-paying stocks.
Until a few years ago, dividends were taxed at your personal income tax rate. But changes in tax laws resulted in a 15 percent tax rate on dividends for most people. This rate was set to expire in 2008, but it has been extended until the end of 2010. At that point, dividends will again be taxed at your individual tax rate, which currently could be as high as 35%.
Of course, things can change. As an alternative to taxing dividends at an individual's income tax rate, lawmakers could decide to impose a higher fixed rate than the current 15 percent. At this point - and maybe at any point - no one can predict these things. Nonetheless, as you prepare your investment strategy, you may want to factor in the possibility that, in the near future, dividends will be taxed at a higher rate than they are now. If this happens, should you still consider adding dividend-paying stocks to your portfolio?
To answer that question, you'll want to assess the benefits that dividend-paying stocks may offer, regardless of how they are taxed. Here are a few of them:
* Potential for rising income - Some stocks have paid - and increased - dividends for many years. So, if you're looking for a possible source of rising income that can help you combat the effects of inflation, you might want to consider these types of stocks. (Keep in mind, though, that companies may decrease or discontinue dividends at any time without notice.)
* Stability during market turmoil - As you are no doubt aware, the stock market has gone through some difficult times for much of 2008. Generally speaking, though, dividend-paying stocks are less volatile than those stocks that don't pay dividends. Furthermore, historically in down markets, dividend-paying stocks tend to outperform non-dividend-paying stocks, although past performance is not an indication of future results.
* Ownership of quality companies - Dividend-paying stocks usually represent well-run businesses that seek to reward their investors. In fact, these are the companies that actually have money to pay the dividends. And despite the many "fads" you can find in the investment world, investing in quality companies never goes out of style.
* Ability to increase ownership shares - If you consistently reinvest your dividends, you'll boost the number of shares you own. This can be particularly beneficial when the market recovers and stock prices rise.
If you invest in dividend-paying stocks, it would be advantageous if the tax rate were to stay at its current 15 percent level. But even if the tax rate were to rise, you've got plenty of good reasons to consider adding these types of stocks to your portfolio - so give them some serious consideration.
This article was written by Edward Jones on behalf of your Edward Jones financial advisor. Edward Jones, its employees and financial advisors do not provide tax or legal advice. You should consult with a qualified tax or legal specialist for professional advice on your specific situation.