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By now you’re probably aware of the fiscal cliff and what it could do to your dividend taxes. But most media sources have only discussed the fiscal cliff dividend tax hike in platitudes rather than practical terms.
As an income investor myself, it would be nice to see an example or two of how fiscal cliff dividend tax hikes could affect my dividends specifically. Since many of you are also income investors, I figured that would be a productive exercise.
Currently, as you may or may not know, dividend income is taxed at 15%, on average. Should the fiscal cliff dividend tax hikes go into full effect on January 1, those rates could rise to as high as 39.6%.
So what does that mean in practical terms? Let’s use old dividend stalwart Johnson & Johnson (NYSE: JNJ) as an example.
Right now, JNJ pays its shareholders an annual dividend of $2.44 per share – a yield of 3.5%. Taxed at 15%, that amounts to a net annual dividend payment of $2.07 – or roughly nine cents less per quarter.
Should the dividend tax rate rise to 39.6%, the net dividend payment for a JNJ shareholder suddenly drops to just over $1.47 per share annually. That’s a full dollar less per share than what you thought you were getting as a Johnson & Johnson shareholder.
Essentially, what originally was a very attractive 3.5% yield becomes a mere 2.1% yield.
You can apply the same formula to any number of high-yielding dividend stocks.
Procter & Gamble (NYSE: PG) would yield 1.9% instead of 3.2%. McDonald’s (NYSE: MCD) would yield 2.1% instead of 3.5%. AT&T (NYSE: T) would yield 3.2% instead of 5.3%.
You get the point.
The fiscal cliff dividend tax will hit income investors where it hurts most. Stocks that are currently considered “high yield” suddenly might not seem so attractive.
Let’s all hope that Congress gets a deal done soon – so that these dividend numbers are all just theoretical.