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.
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.
"This dividend tax circumstance reinforces the case for being an active, global dividend investor," Manasseh wrote.
Since U.S.-listed dividend stocks are primarily populated with U.S. investors, these securities will be the ones most at risk to portfolio repositioning ahead of the tax hikes. On the other hand, international dividend stock shareholders are unaffected by the U.S. tax changes and international offerings come with attractive yields.
Additionally, investors may also find opportunities in high-quality dividends if the market over-reacts and dumps dividend stocks entirely.
International dividend ETFs include:
- WisdomTree International LargeCap Dividend Fund (NYSEARCA:DOL): 3.59% yield
- WisdomTree International Dividend ex-Financials Fund (NYSEARCA:DOO): 4.66% yield
- SPDR S&P International Dividend ETF (NYSEARCA:DWX): 6.66% yield
- iShares Dow Jones International Select Dividend Index Fund (NYSEARCA:IDV): 5.19% yield
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.