Dividend ETFs should remain popular in 2013 for yield as the dividend tax rate for most investors will stay at 15% as part of the fiscal cliff deal, not including the Affordable Care Act surcharge of 3.8% for some.
“After a brief year-end disruption related to the fiscal cliff negotiations, the hunt for dividend income is back on with a vengeance,” reports Jeff Benjamin at InvestmentNews.
Under the fiscal cliff deal, the tax rate on qualified dividend income jumps to 23.8% for households earning more than $450,000, or $400,000 for a single person, which includes a 3.8% tax on investment income to help pay for Obamacare, according to the article. The health care law tax kicks in for households making $250,000, or $200,000 for singles, adding up to an 18.8% tax on dividends and capital gains at those income levels. [Dividend Stocks, ETFs Could See Higher Payouts]
“At the end of the year, people were unloading their dividend payers, but a lot of that has since snapped back, and dividend stocks have started to resume their strong performance,” said Jay Wong, a portfolio manager at Payden & Rygel, in the InvestmentNews story.
The largest dividend ETFs include Vanguard Dividend Appreciation ETF (NYSEArca: VIG), Vanguard High Dividend Yield (NYSEArca: VYM), iShares Dow Jones Select Dividend Index (NYSEArca: DVY), SPDR S&P Dividend ETF (NYSEArca: SDY), Schwab U.S. Dividend Equity ETF (NYSEArca: SCHD) and WisdomTree LargeCap Dividend Fund (NYSEArca: DLN).
The ETFs have been very popular with investors seeking yield in a low-rate market for bonds.
“Higher taxes on dividends in 2013 were supposed to threaten one of Wall Street’s most popular investment themes in recent years: buying and making money on dividend-paying stocks. But the death of dividend investing seems to have been greatly exaggerated,” USA Today reports.
Investors are relieved that dividend tax rates didn’t rise as much as some had forecast.
“Most investors thought there would be some (fiscal cliff) deal,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, in the article. “However, few thought the deal would be as good as it was.”
Full disclosure: Tom Lydon’s clients own DVY.