Dividend Tax Relief: 9 Wide-Moat Stocks to Watch
If Bush's plan goes through, these stocks become more attractive.
Part of the Bush economic stimulus package is to eliminate taxes that individuals pay on dividends, and whatever you may think of the plan, it's certainly great news for corporate shareholders. First of all, it reduces the disincentive for companies to return cash to shareholders--and given the propensity of corporations to squander money, it would be wonderful to see more cash given back to shareholders through dividends. Secondly, the penalty of holding high-yielding stocks in taxable accounts goes away, increasing the appeal of dividend-paying stocks.
Even before Bush's plan, dividends had gotten sexy again. History tells us that a large component of the stock market's total return comes from dividends, but it's usually only in bear markets that anybody cares. After all, the mailman continues to deliver dividend checks in bear markets, whereas capital gains by definition disappear. (For those of you looking for a refresher on dividend yield, check out this Morningstar.com Investing Classroomcourse on the topic.)
I did oversimplify just then. The mailman continues to deliver the dividend check--but only if the company is still healthy enough to pay it. And that's the trick in finding good high-yield stocks. At any given time, a list of the highest-yielding stocks will contain some truly horrible names: stocks that have plummeted and whose dividends will surely be cut or eliminated. As long-term investors, we want companies that can continue to pay dividends even in hard times.
Haywood Kelly, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.