Iâ€™ve already explained why the current hullabaloo over the potential â€“ and severe â€“ increase to dividend tax rates is unwarranted. (See here and here.) And itâ€™s simply because tax increases wonâ€™t win the White House. So dividend tax rates are not going to skyrocket.
For argumentâ€™s sake, though, letâ€™s assume they do increase sharply in 2013.Â Under such a scenario, countless pundits are warning of disastrous repercussions. Two â€śimminentâ€ť repercussions in particular seem to be really striking fear in the hearts of dividend investors.
As a result, dividend stock prices are going to collapse.
And weâ€™ll all suffer.
The rationale behind this argument is that these Americans rake in a majority of the dividends paid out each year.
So itâ€™s only natural for them to bail on dividend stocks in favor of more tax-efficient investments.
Sounds reasonable. But itâ€™s total hogwash! And today Iâ€™m going to prove it.
Then, in Part 2 â€“ which weâ€™ll publish next Thursday â€“ Iâ€™ll show you why the second most feared repercussion of a dividend tax hike is similarly bogus.
Iâ€™m talking about the notion that companies are going to stop paying dividends and/or stop increasing dividends in favor of share repurchases because it will be the most tax-efficient way to return cash to shareholders.
Consider this our version of the Discovery Channelâ€™s â€śMythBustersâ€ť show.
Instead of science, weâ€™re taking on conventional wisdom in finance. And it starts right nowâ€¦
Stop Spreading the Untrue Newsâ€¦
Winston Churchill once said, â€śA lie gets halfway around the world before the truth has a chance to get its pants on.â€ť Thatâ€™s certainly apt in this instance.
You see, claiming that Americaâ€™s highest earners receive the lionâ€™s share of dividend payments sounds like a logical assumption. Thatâ€™s probably why itâ€™s spread so quickly. But itâ€™s not true. Not if we look at the hard data.
Based on individual tax returns, Americans earning more than $200,000 per year actually only took home 46.6% of dividend payments made to individuals in 2010.
If we go back in time, we notice an interesting trend, too.
Earlier in the decade, the highest earners did receive the majority of dividend payments. In 2007, they collected 63% of dividend payments to individuals.
More recently, though, their cut has actually been decreasing, while the â€ścutâ€ť for Americans making less than $200,000 per year is actually increasing.
In other words, itâ€™s â€śThe 99%â€ť that benefit the most from dividends right now. They wield the most influence over dividend stocks, not â€śThe 1%.â€ť
Naysayers will be quick to point out that the 2011 tax return data could reverse this trend. Fair enough. Even still, Americaâ€™s highest earners wouldnâ€™t wield undue influence over dividend stock prices. And hereâ€™s whyâ€¦
Not all dividends are paid to individuals. Many are paid to various types of corporations or non-profits, which arenâ€™t concerned with individual tax rates.
Turns out, if we look at the payments to individuals from this bigger perspective, the â€ścutâ€ť for Americaâ€™s top earners is much smaller.
Americans earning over $200,000 per year received 20.1% of total dividend payments in 2010. Meanwhile, Americans earning less than $200,000 per year received 23%.
While 20% is a meaningful amount, itâ€™s not the majority like the headlines suggest. Nor is it enough to collapse stock prices if they suddenly bail. Too many other interested parties own the same stocks, who would likely scoop up shares on any noticeable dips.
If youâ€™re still not convinced, chew on this: Despite numerous changes to tax rates since the early 1990s, the number of individuals reporting dividend income on their tax returns has remained fairly steady. Both in absolute terms and as a percentage of the total population.
Interestingly enough â€“ as youâ€™ll notice in the chart â€“ the last time dividend tax rates rose, the number of Americans investing in dividend-paying stocks made a noticeable move higher, not lower. That runs contrary to what so many pundits are suggesting today. So unless â€śitâ€™s going to be different this time,â€ť this serves as another reminder to always dig beneath the headlines for the truth, like we did with Ritchie Bros. (NYSE: RBA or Toronto: RBA.TO).
Bottom line: Forget â€śplausibleâ€ť or â€śconfirmed.â€ť The myth that Americaâ€™s top earners own the majority of dividend stocks and will bail â€“ sending prices dramatically lower if dividend tax rates spike â€“ is busted!
Remember, in next Thursdayâ€™s article, Iâ€™ll dispel the myth that corporations are going to suddenly suspend or stop increasing dividends in favor of share repurchases.
Stay tuned and safe investing,
The $1.7 Trillion "Dividend Vault" That Could Save Your Retirement [sponsor]
"It's the easiest way I know of to collect thousands of dollars every month for the rest of your life. But you'll want to invest soon to get your full share..." Click here for the details.
Source: Dividends and Income Daily