Tax Hike Could Discourage Dividend Revival

Some companies may advance timing of payments ahead of 2013 spike in dividend tax.

Corporate dividends have flourished recently, but a coming hike in the federal tax on dividends could discourage the renewed corporate interest in making dividend payments.

While dividends took a beating in 2008 and 2009 in the wake of the financial crisis, “they have now come back and set a brand new record,” says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. He expects S&P 500 companies to pay a record $276 billion in dividends this year, surpassing the previous record of $248 billion paid in 2008.

Companies are another matter. “Companies are going to look at [the higher tax rate] and say, ‘Should I be increasing my normal dividend at this rate if my holders don’t get to keep as much?’” Silverblatt says. “We don’t think anyone will say, ‘I’m not going to pay,’ but some companies might divert some money from dividends to buybacks. It will put some pressure on dividends and probably add to buybacks.”

He also expects some companies that are scheduled to make dividend payments next January to try to shield shareholders from the tax hike by making those payments late this year, a practice he calls Q5 payments. U.S. companies paid $21 billion in qualified dividends in January 2012, Silverblatt notes. “Companies that pay in January are going to move up those payments and pay in December.”

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