Dividend ETFs and some traditional yield-producing sectors faced some pressure in November on expectations dividend tax rates will rise in 2013 as fiscal cliff negotiations look set to go down to the wire.
However, that doesn’t mean investors should automatically dump their dividend ETFs.
“The bottom line conclusion of our research is that the market environment is more important than the tax environment,” says Jeremy Schwartz, director of research at WisdomTree Investments (NasdaqGM: WETF)
Investors can also consider ETFs focusing on high-quality companies that also pay attractive dividends.
“Instead of investing in stocks that pay fat dividends, it may make more sense to consider why dividend-paying companies are so appealing — other than the payments themselves — and look for ways to invest in ones possessing such qualities,” writes Conrad de Aenlle for MarketWatch.
Reliable dividend payers are able to provide shareholders with extra pocket change because the companies have healthy cash-flow generation, he notes. The free cash flows would help with dividends, buybacks and reinvestment into the business.
It is the companies that provide value, not so much as the dividends have value. As such, the companies are worth owning in their own right and the dividend payments are just gravy, de Aenlle argues.