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Business Sense column
By Bill Freehling
THIS IS NOT an
Instead, it's because investors are faced with so much uncertainty right now regarding taxes. And if the changes take place as it now appears, one of investors' most attractive options might become significantly less appealing.
Many times in this column I have extolled the virtues of dividend-paying stocks. The recession has led many risk-averse investors to pile into the perceived safety of bonds. That has helped keep bond interest income low, in many cases under 2 percent.
On the other hand it's easy to put together a basket of dividend-paying, high-quality stocks that yield 4 percent or better. To me the choice of stocks vs. bonds has been a fairly easy one given these facts.
But the decision will get much harder if the Bush-era 15 percent tax on qualified dividends goes away effective Jan. 1, as it's now scheduled to do unless Congress acts.
Should that take effect, dividends will be taxed as ordinary income, meaning even people in a mid-level tax bracket will have to pay the government about a third of their yield. In other words a stock that yields 3 percent would yield 2 percent after tax. The hit is even bigger for wealthy investors in the highest tax brackets.
Whether that's good policy is up for debate. But regardless of their political leanings, this shift might force dividend investors to re-evaluate their strategies.
Sadly, the alternatives don't look much better. Income on real estate investment trusts are also taxed as ordinary income. So many people have piled into tax-free bonds that their yields are now pretty low, which is great for local governments but bad for people needing income from investments.
Stocks that don't pay dividends might become more popular under this new set of facts. Many companies may see the writing on the wall and replace dividends with stock buybacks. Investors may be better off buying growth companies and then selling some shares when they need income, since long-term capital gains rates are scheduled to rise only from 15 percent to 20 percent, lower than most investors' tax brackets.
For those who don't already own one, buying a house looks like a smart investment as well. People can borrow money at rock-bottom rates. Should inflation kick in as expected over the next several years, the required mortgage payment will be lower in real dollars.
For now, it's probably not a good idea for investors to make many changes to their portfolios, because it's entirely possible that Congress could change the rules over the next six weeks. But as it gets closer to year-end and tax policy for 2013 becomes more certain, individuals should consider repositioning their assets to better reflect what could be the new normal for taxes.
Staff reporter Bill Freehling writes this biweekly column on business, personal finance and investing. He can be reached at 540/374-5405 or