The final verdict on the "fiscal cliff" isn't in, but it seems pretty certain that dividends will be taxed at a higher rate in 2013.
The current maximum rate of 15 percent is set to expire next month, and the rate may nearly triple to 43.4 percent for those in the top income bracket. But higher taxes won't necessarily cause companies to pull back on paying dividends.
In fact, if history is any guide, according to Goldman Sachs, companies may decide to protect investors from higher taxes by rewarding them with higher dividends.
A key reason is that companies in the Standard & Poor's 500 index have a near-record $985 billion in cash reserves. Companies have plenty of cash available to keep increasing their dividends.
In addition, the ratio of dividends being paid relative to cash on their balance sheets remains historically low. Payments also are low relative to earnings. S&P 500 companies will pay an estimated $281 billion, almost 36 percent of their profits, in dividends this year versus a historical average of 52 percent, according to Howard Silverblatt of S&P Dow Jones Indices. This year's total is on track to break a 2008 record and Silverblatt expects an even higher amount to be paid in 2013.
Another factor is that companies are reluctant to cut their dividend because that's generally viewed as a sign of potential trouble. Even with higher rates, after-tax yields from dividend stocks will remain attractive compared with Treasury bonds and money-market mutual funds, for example. Says Silverblatt: "Dividends may be the only game in town for investors looking for current income."Associated Press