Popular dividend ETFs could lose some of their appeal with wealthy investors if the lower Bush-era tax rate of 15% on qualified dividends is allowed to expire at the end of the year.
President Obama wants dividends for higher-income earners to be taxed as ordinary income, a measure the U.S. Senate didn’t approve, The New York Times reports.
That means these investors could see dividends taxed as high as 39.6%. [Tax Debate Puts Dividend ETFs in Focus]
Treasury Secretary Timothy Geithner presented House Republicans with a fiscal cliff proposal that included taxing dividends as income, according to the NY Times story.
“Thanks to the 2003 tax cuts enacted under President Bush, dividend tax rates are now extremely low. They were higher in both the 1980s and the 1990s. Extremely affluent households have been the main winners from that 2003 tax cut because the wealthy own the vast majority of all stock,” writes David Callahan at The Huffington Post.
“Obama’s proposed hike in dividend taxes on the wealthy will raise over $200 billion for deficit reduction over the next decade,” he added.
Some of the largest dividend ETFs for U.S. stocks include Vanguard Dividend Appreciation (NYSEArca: VIG), iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY), iShares High Dividend Equity Fund (NYSEArca: HDV), SPDR S&P Dividend ETF (NYSEArca: SDY), Vanguard High Dividend Yield Index Fund (NYSEArca: VYM), WisdomTree Dividend Top 100 Fund (NYSEArca: DTN) and First Trust Morningstar Dividend Leaders (NYSEArca: FDL). [Dividend ETFs, Potential Tax Hikes and the Fiscal Cliff]
“Many investors are particularly worried that dividend stocks are vulnerable given the potential for a near tripling of the tax on dividends,” said Russ Koesterich, BlackRock Chief Investment Strategist. [Three Reasons Not to Flee Dividend ETFs]
iShares Dow Jones Select Dividend Index Fund
Full disclosure: Tom Lydon’s clients own DVY and VYM.