By Dr. David Eifrig, editor, Retirement Millionaire (DailyWealth | Original Link)
If you’ve done the “right thing,” chances are good you’re worried about January 1, 2013.
When I refer to doing the “right thing,” I mean you’ve spent many years saving money and investing it for the future. And if you really did the right thing, you put a portion of your savings in safe, dividend-paying stocks.
As DailyWealth readers know, owning safe, dividend-paying stocks is one of the foundations of a wealthy, worry-free retirement. It’s the surest way to grow long-term wealth in the stock market.
But starting January 1, the government is gearing up to go after your dividend streams. Here’s what you need to know…
Right now, laws that cut taxes on dividends to 15% are due to expire at year-end. Unless Congress acts to extend the 2003 tax cut (one of several commonly referred to as the “Bush-era tax cuts”), dividends will once again be taxed at the personal income tax rates. That could more than double the taxes you pay on your dividends.
As a result, some investment advisors are recommending people dump dividend-paying stocks in advance of the change and move toward investments that they say would offer more tax relief.
But I disagree…
I went back and looked at the facts. I found that the government has changed dividend taxes seven times in our history. If you look at how those changes affected the market, you’ll see good news…
In the 20 years leading up to 1936, the government did not tax earnings paid in the form of dividends… It was tax-free income. But in 1936, President Franklin Delano Roosevelt made them fully taxable.
As you can see in the table below… stocks, as measured by the S&P 500 or equivalent, rose in the year of the tax hike… and each of the next two years.
|Year of Change||Dividend Tax Rate
for Top Tax Bracket…
|Percentage Change in Stocks
From One Year Prior To
Tax Change Through…
|Tax Exempt||1 Year After
|2 Years After
|1954||First $50 Exempt||35.4%||71.2%|
|1964||First $100 Exempt||34.3%||46.5%|
|1981||First $200 Exempt||13.5%||30.3%|
As part of a stimulus plan, the government made dividends tax-exempt again in 1940. And stocks fell during the following three years. (Of course, we were fighting World War II at the time.)
For the rest of the century, if you look at the periods following a change in the dividend tax rate, you see positive returns. The exception is with the 2003 change… when the tax was cut from fully taxable to the current 15% rate.
When it comes to investing, you shouldn’t believe in myths and follow “conventional wisdom.” You should demand facts and scour them to find the best possible ways to invest your hard-earned money.
And here, the reality is changes in dividend taxes don’t seem to hurt stock performance… If anything, on average, stocks rise after changes (up or down) in the tax regime.
So you have no reason to make any drastic changes to your investments based on the fear of higher dividend taxes. Stick to the fundamental ideas I’ve shared in DailyWealth, like asset allocation, position sizing, and stop losses.
Stop worrying about the potential January tax hikes. Sleep well at night, earning safe and steady dividend income from fantastic blue-chip stocks… History says they’re still great investments.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor’s note: Doc Eifrig edits Retirement Millionaire, which focuses on the best ways to grow and preserve your wealth… no matter what the government is doing. Doc recently put together a presentation on how you can get real, hold-in-your-hand silver from your local bank… essentially for free. To view this presentation – and learn about a subscription to Retirement Millionaire – click here.
Last year, Doc taught readers an unusual way to generate huge, steady income streams from his favorite dividend-paying blue-chip stocks. Get the full story here: How to Make 80% a Year While Stocks Go Nowhere.
Dan Ferris says elite dividend-payers are different from typical stocks. In fact, he believes investing in them is “the single-best way to get rich in stocks.” Read more here: A Common Sense Guide to “World Dominating” Dividend Stocks.
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