The $78 Billion Question Affecting Dividend Stocks Today

The worst of it came in the first three months after the tax increase, as non-payers gained about 50% more than payers during that time.

However, longer term, dividend payers far out-performed the broader market. During the past 40 years, S&P 500 dividend payers returned an average 8.7% annually versus just 1.5% for non-dividend payers, according to Ned Davis Research. So a short-term correction could prove to be a buying opportunity.

The long-term outperformance is driven by value. If dividend taxes were to rise, then fundamentally sound high-yield stocks will still look attractive compared with other income investments.

For example, the 10-year Treasury yields 1.6% right now. By comparison, a blue-chip stock like Verizon Communications Inc. (NYSE:VZ) yields almost three times more at about 4.7%… and it offers a growing dividend versus the fixed-rate return of a bond.

Both would be taxed as ordinary income.

Action to Take –> We will likely see a compromise in the coming days, but questions remain about what that compromise will contain and what impact it will have on the economic recovery.

So, if you’re thinking about taking capital gains on a position, then now might be a tax-efficient time to do so.

The capital gains rate could increase from 15% today to as high as 23.4% come Jan. 1, 2013… you might be glad you took some profits early.

This article was originally written by Carla Pasternak, and posted on StreetAuthority.