A Silver Lining to the Fiscal Cliff (Visscher)

A Silver Lining to the Fiscal Cliff

by Steve Visscher, Mawer Investment Management
A recent report from Standard & Poor’s noted that hundreds of American companies have paid special dividends in recent weeks. That number is rising each day. Is this a sign of financial strength in corporate America? Are management teams feeling more secure about the future? Maybe. But there is another explanation that seems more logical – the looming fiscal cliff. Let’s examine why.

Currently, U.S. taxpayers face a 15% tax rate on dividends. It's been that way for nearly a decade. But on January 1st, this rate is expected to rise. Rise is a kind word. Skyrocket may be more appropriate. Indeed, some U.S. taxpayers may pay nearly triple what they are paying today. Congress could still agree to a more modest increase, but time is running out. Besides, low rates on dividends are generally viewed as a perk for the wealthy, so the impetus to reverse these tax hikes is weak.

In anticipation of these changes, U.S. companies have been busy declaring special dividends, or simply changing already scheduled dividend payments from 2013 to 2012. Cynics will note that corporate executives, who are often large shareholders themselves, will reap the greatest tax savings from receiving these special dividends. But while executives are often vilified for their compensation levels, let’s give credit where credit is due. Assuming companies do not aggressively exhaust cash reserves or incur debt to pay these dividends, these are shareholder-friendly decisions that will reduce the future tax burdens. It’s proactive. It’s prudent. And the surge in dividends provides investors, including ourselves, with the opportunity to allocate idle capital back into more productive ventures.

The fiscal cliff has been synonymous with doom and gloom. But there is a silver lining to almost every story. And in this case it’s been an abundance of dividends.

Steven Visscher
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