Long-term costs not factored, experts say
That’s because a January payment may nearly triple the tax rate that the highest earners must pay on dividends — to 43.4 percent from 15 percent, the rate in place since 2003.
If decade-old tax cuts are allowed to expire at the end of this year, dividends will be taxed like ordinary income, and the top rate for ordinary income will rise to 39.6 percent from 35 percent.
High earners will pay an additional 3.8 percent to offset the cost of President Barack Obama’s health care overhaul.
Obama and Republicans in Congress are fighting over whether the top rate for ordinary income should increase. Republicans would prefer that the dividend tax remain at 15 percent but have not taken a hard line on it publicly.
Between Nov. 1 and Dec. 5, 349 companies moved up their dividends or paid special dividends, according to Silverblatt. That is higher than the 314 irregular dividends paid last year in all of November and December.
Normally, when a board declares a special dividend, it’s a sign of financial strength, experts say. That confidence can attract investors and boost the company’s stock price. But these are not normal times. With so many companies declaring special dividends, professional traders have a warning for everyday investors.
Peter Tchir, who runs the hedge fund TF Market Advisors believes some companies are not considering the long-term costs of their decisions. “People should scour these companies and see if they’re doing some damage to themselves on the credit side,” he said.
Many of the special dividends, it turns out, are not drawn from the proverbial mountain of cash that companies have been sitting on since the onset of the Great Recession. Costco last month declared a special dividend of $7 per share, or about $3 billion. To pay for it, the company borrowed $3.5 billion. That caused Fitch, a rating agency, to downgrade Costco, though its rating remains relatively high. Costco declined to comment.
Tom Pemberton, of Pemberton Financial Planning, says it’s not unusual for companies to pay questionable special dividends to satisfy big shareholders — especially when they sit on the board. “If I’m a large stockholder, I’m going to say, ‘Hey, let’s go ahead and have a special dividend,’ ” he said.