Monday, April 17, 2006

The Dividend Quagmire

The Dividend Quagmire (Microsoft)

Despite the utter depravity of our congress when it comes to "Fiscal Awareness" they have done some good things, and one of them is set to expire in just a few years. The tax on dividend income was lowered to 15% (I prefer zero) and thus increased the amount of your dividends that you keep as well as the number of companies paying dividends.

Previous to this lowering of the dividend rate companies would avoid paying dividends because investors preferred to recieve their gains from their stocks in the form of capital gains which were taxed more favorably (this is accomplished through share buybacks for the most part, but could also be in the form of reinvestment). Once dividends and capital gains taxes became the same there was no reason for a company to not pay dividends. The linked article gives a bit of a history of dividends and then details why keeping the rate low is important to you and to the economy.

My preferred capital gains rate and dividend rate is zero percent as I don't believe in double taxation, but that is unlikely to happen, so lets at least attempt to persuade our congressmen and women to do the right thing and not raise the tax on dividends.

Scott Dauenhauer, CFP, MSFP