The tax cuts implemented by the Bush administration could soon be coming to an end. If you are affected by this change, it may also be prudent to look over your holdings of dividend income and related exchange traded funds (ETFs).
Companies have heavily cut costs and spending in the last couple of years, which has left them sitting on a mountain of cash, writes Jeff Benjamin for InvestmentNews. This is good news for dividend investors. [MLP ETFs: High Yields Lure Investors.]
But the bad news is that Congress may increase tax rates on dividends. Congress could decide to change the current 15% tax rate on dividends along with the end of Bush tax cuts on Jan. 1. Still, dividends make up a large proportion of returns, generating between 20% and 40% of total returns of the S&P over the last nine decades, says John Buckingham, chief investment officer at Al Frank Asset Management, Inc. Most major companies probably won’t change the way they pay dividends. [Utility ETFs: Growth and Income, All In One.]
Buy-and-hold investors who invested in quality companies over the last decade saw their stocks gain and stumble as a result of market volatility, remarks sagitarius84 for The Motley Fool. The only constant those investors enjoyed came from dividends. While yields were bottomed out, quality stocks kept raising dividends. If investors reinvested the payouts during those down times, they would have bought when the market was at its low. [Dividend ETFs: Which Sectors Are Best?]
ETFs offer a plethora of choices, but too many investment options isn’t necessarily a good thing, comments Elizabeth Ody for Kiplinger. High-yield investments tend to be associated with less stable companies, and a large proportion of top yielders are in the financial sector. If you’re looking to this area, pick out dividend ETFs that won’t heavily weight a portfolio on a specific sector or type of investment that’s undesirable to you.
- Vanguard Dividend Appreciation (NYSEArca: VIG). This fund focuses on dividend growth – companies that have increased payouts in each of the last ten years. VIG includes around 200 high-quality blue-chip names.
- SPDR S&P Dividend (NYSEArca: SDY). The underlying index includes any company that has increased dividends in each of the last 25 years, which includes 50 stocks with the highest yields. The portfolio leans more towards utility, industrial and consumer-related stocks.
- PowerShares International Dividend Achievers Portfolio (NYSEArca: PID). The fund includes high-yield companies that have increased payouts in each of the last five years.
- SPDR S&P International Dividend (NYSEArca: DWX). DWX includes 100 highest-yielding stocks outside of the U.S.
- WisdomTree Emerging Markets Equity Income (NYSEArca: DEM). DEM holds the 30% of emerging market stocks with the highest yields. It should be noted that Taiwan makes up 33% of the fund.
For more information on dividends, visit our dividend category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.