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Fiscal Cliff is no reason to ditch your dividend stocks

In recent months, you have undoubtedly read a lot of articles on the looming fiscal cliff. A lot of these articles have mentioned the real possibility of higher capital-gains taxes, and suggested ways to take advantage of the panic they are causing among dividend investors (some of which I have even written).

The logic behind the concept is pretty simple… higher taxes on dividends may send investors looking elsewhere to avoid paying slightly higher taxes. While the logic is sound, I feel it is important to point out that dividend stocks are, and will continue to be, a great investment vehicle.

Yes, we are most likely going to see a higher tax on dividends starting next year, but in most cases you are still going to get a higher after-tax yield than you can find in most fixed-income assets.

The Federal Reserve has pushed interest rates near zero, and is expected to continue with this policy at least through next year. Super-low interest rates make it almost impossible to earn the same sort of income from fixed-income interest as you can earn by collecting dividends, even after you take into consideration the higher tax rate.

I believe the key point is that regardless of what the tax rate winds up being on capital gains, investors should NEVER buy or sell a stock solely on the basis of its dividend. Doing so is a sure-fire recipe for failure. If you find a stock that has a nice dividend, has historically raised dividends each year, and has been growing its earnings, then this is the type of stock a solid dividend investor should continue to hold, or even consider buying.

As it currently stands, it appears to be a foregone conclusion that taxes on dividends are going up next year. The only question is how much will they increase. The tax on dividends is currently capped at 15%, but it is scheduled to rise to whatever your regular income tax rate is, which could mean an increase up to 43.4%, depending on your income level. I believe this is highly doubtful. They will go up, that is for sure, but most likely will wind up somewhere in the range of 20% to 28%.

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.