As the markets keep close tabs on the fiscal cliff and the potential dividend tax hikes, U.S. dividend exchange traded funds could experience greater volatility ahead, but investors can maintain some dividend income exposure with international picks instead.
Since 2003, qualified dividends were taxed at a favorably low 15% tax rate, but with the so-called Fiscal Cliff looming overhead, investors could see rates finally rise.
“The attractiveness of dividend-paying stocks will continue in an environment characterized by financial repression, but we also believe that such a tax increase has the potential to result in higher near-term price volatility in certain dividend-paying stocks,” Raji O. Manasseh, PIMCO senior vice president and dividend strategies product manager, said in a report. [Dividend ETFs: What Obama Win Means for Tax Rates]
Specifically, “we believe the stocks at greatest risk of a selloff are those with large U.S. shareholder bases susceptible to the tax increase,” Manasseh added. “We believe near-term volatility in dividend stocks will affect the narrow spectrum of U.S. dividend payers with greater than 3% yields that investors have crowded into, including U.S. telecoms and utilities.”
Consequently, the higher tax rates will push investors toward more attractive yielding assets and away from the usual dividend picks. [Dividend ETFs 2.0]