Taxing Dividends

It has been nearly five years since President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003, which as one of the tax provisions converted the tax on dividends so that most people would pay a maximum tax rate of 15% (or less) as compared to at the regular tax rate prior to the new law. There are provisions of certain holding periods and other items which I'm not going to go into detail on in this post but I thought it would be interesting to take a look at how the higher yielding stocks have done since the law was officially signed in late May 2003 to the end of the first quarter of 2008.

In my opinion, this is especially important when considering the potential tax law changes which are likely to occur over the next couple of years which will likely bring dividend income tax rates back to their levels prior to 2003. I have used 6/1/03 as the starting date with 3/31/08 as the ending date for this analysis or 58 months and am using the Russell 1000 as the universe of stocks with performance broken down into quintiles.

Performance by Yield:
Highest Yielding stocks (2.89%+) 47.2%
Second Group (1.95%-2.89%) 67.2%
Third Group (0.95%-1.95%) 55.3%
Fourth Group (0.03%-0.92%) 45.9%
Fifth Group (<=0.03%) 45.9%

As you can see in this nearly 5-year period higher yielding stocks tended to outperform although not be as high as may have been expected considering some of the tax advantages. The highest yielding stocks suffered early in the period as well as in the last half of 2007 when some of the high yielding financials suffered some difficulty in performance.

You can get a glimpse at my portfolio by going to www.vestopia.com/danw. My personal philosophy is to buy those securities which offer the greatest opportunity of potential return at a low to moderate level of risk in a portfolio context. I do not have a preference either way as to whether the company is paying or not paying dividends as I am looking at the entire appreciation potential of the company's stock although I do prefer companies who are shareholder friendly.