Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

Tax Reform And Dividend ETFs: Cause For Concern?

Fri, Mar 2, 9:14 AM ET, by Michael Johnston

Dividend ETFs have been at the intersection of two of the hottest investing trends over the last year or so, turning in stellar performances and attracting huge cash inflows. Interest in dividend-paying stocks has skyrocketed, as these securities have double-edged appeal as tools for both smoothing overall volatility and enhancing the current returns derived from equity portfolios. In an environment with several large risks continuing to loom overhead and depressed interest rates, that combination is tough to beat. Not surprisingly, ETFs have become a preferred vehicle for accessing dividend-focused strategies; there are now more than 45 dividend ETFs accessible to U.S. investors, with aggregate assets of more than $40 billion [see Premium Report: Dividend ETFs In Focus].

Dividend ETFs have turned in some impressive performance figures over the past 14 months or so; since the start of 2011, the WisdomTree Large Cap Dividend Fund (DLN) has beaten the S&P 500 SPDR (SPY) by nearly 500 basis points. That margin is particularly impressive considering that stocks have generally been up over that period, and dividend payers should presumably be “safer” investments.

Despite the recent success, dividend ETFs could be setting investors up for a colossal disappointment. As Meb Faber pointed out in a post last month, dividends could be squarely in the crosshairs of a proposal being tossed about Washington. A recent budget proposal from the Obama administration includes a significantly higher tax on dividends, essentially taxing payouts from companies as ordinary income. That translates to a jump from a flat rate of about 15% now to nearly 40% for Americans in the top tax bracket. It’s estimated that the change would raise more than $200 billion over ten years, helping to close the widening budget deficit [see High Yield ETFdb Portfolio].

Dividend ETFs In Danger?

Faber’s analysis of this potential development focused on the impact this legislation would have on companies–specifically, that they would continue to reduce dividend payments in favor of stock buybacks in order to maximize after tax returns delivered to shareholders. When the tax rate on capital gains is lower than the tax rate on dividends, it is logical to conclude that most investors will prefer capital gains.

But there is another potential ramification of this element of the most recent budget proposal; a spike in the taxes on dividends would make the securities that deliver a significant portion of their returns through distributions less appealing to investors. Relative to securities that rely on capital appreciation (i.e., the non-dividend payers), dividend stocks would lose a bit of their luster [see ETF Tax Tutorial]. Just as the drastic cut on dividend tax rates in the early 2000s gave a boost to dividend-paying stocks, the reversal of this policy would deal them a one-time body blow. The proposed tax hike would likely reverse the tremendous interest in this asset class that has built up in recent years, and cause investors to lose a significant portion of their dividend appetite.

Dividend ETFs To Watch

Given the gridlock that has gripped Washington over the last couple years, a jump in the dividend tax rate is certainly not a done deal–far from it. But it remains a possibility in an election year where anything can happen and outrage sparked by the low effective tax rates incurred by the Mitt Romneys and Warren Buffetts of the world is escalating. It’s also worth noting that the proposed hike on dividend tax rates wouldn’t be unprecedented–in fact, it was the norm until the Bush tax cuts went into effect in 2002 (those in the top tax bracket paid a top tax rate of 35% of dividends).

There are about four dozen ETFs that focus on dividend-paying companies, including some that value consistency of dividends and others that zero in on the most attractive dividend yields [see 12 High Yielding Commodities]. A few of the more popular dividend ETFs that could be impacted by any changes to tax policy include:

  • Vanguard Dividend Appreciation ETF (VIG): This ETF focuses on companies that have steadily increased their dividend; the portfolio includes companies that have recorded dividend increases for at least ten consecutive years, including stocks like McDonald’s, IBM, and Coca-Cola.
  • iShares Dow Jones Select Dividend Index Fund (DVY): This ETF is linked to an index that consists of about 100 high-yielding stocks; the underlying benchmark screens potential components by dividend growth rate, dividend payout percentage, and average daily trading volume.
  • SPDR S&P Dividend ETF (SDY): This ETF is linked to the S&P High Yield Dividend Aristocrats Index, a benchmark that includes companies that have increased dividends for at least 25 consecutive years. Pitney Bowes ant Cincinnati Financial Corp., and AT&T are among the largest individual allocations in this ETF.
  • Vanguard High Yield Dividend ETF (VYM): This ETF includes the non-REIT stocks with the highest dividend yields; currently, top components include Exxon, Microsoft, and Chevron.

Disclosure: No positions at time of writing.


SDI Glossary: "Commodities" Definition
SDI Glossary: "Dividend" Definition
SDI Glossary: "Equity" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "iShares" Definition
SDI Glossary: "Yield" Definition
This Article's Word Cloud:   Dividend   ETFs   Focus   Fund   High   Index   That   This   Washington   Yield   about   benchmark   bracket   budget   capital   companies   components   could   dividend   dividends   focused   from   have   includes   including   investors   last   linked   more   most   over   paying   policy   potential   proposal   rate   rates   recent   returns   securities   stocks   than   that   their   there   this   time   with   would   years

| More

General Dynamics Achieves #117 Analyst Rank, Surpassing Prudential Financial
Thu, Aug 28, 12:14 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

IEMG, BAP, MBT, SCCO: ETF Inflow Alert
Thu, Aug 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IEMG, BAP, MBT, SCCO Exchange traded funds (ETFs) trade just ...

IYM, LYB, PX, FCX: Large Inflows Detected at ETF
Thu, Aug 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IYM, LYB, PX, FCX Exchange traded funds (ETFs) trade just ...

BLV: ETF Inflow Alert
Thu, Aug 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: BLV Exchange traded funds (ETFs) trade just like stocks, but ...

IEF: Large Outflows Detected at ETF
Thu, Aug 28, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IEF Exchange traded funds (ETFs) trade just like stocks, but ...

Proshares Short 20+ Year Treasury Getting Very Oversold
Thu, Aug 28, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Proshares Short 20+ Year Treasury ETF (TBF) entered ...

iShares MSCI Switzerland Capped Breaks Below 200-Day Moving Average - Notable for EWL
Thu, Aug 28, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI Switzerland Capped ETF (EWL) crossed below ...

TTT Crowded With Sellers
Thu, Aug 28, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Proshares UltraPro Short 20+ Year Treasury ETF (TTT) ...

TMV Crosses Critical Technical Indicator
Thu, Aug 28, 10:54 AM ET, by ETF Channel

In trading on Thursday, shares of the Daily 20+ Year Treasury Bear 3x Shares ETF ...

11.7% of FPX Holdings Seeing Recent Insider Buys
Thu, Aug 28, 9:54 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust US IPO Index Fund ...

Cullen/Frost Bankers a Top Ranked SAFE Dividend Stock With 2.6% Yield (CFR)
Thu, Aug 28, 9:54 AM ET, by ETF Channel

Cullen/Frost Bankers, Inc. (CFR) has been named to the Dividend Channel ''S.A.F.E. ...

CenturyLink a Top Socially Responsible Dividend Stock With 5.3% Yield (CTL)
Thu, Aug 28, 9:54 AM ET, by ETF Channel

CenturyLink, Inc. (CTL) has been named a Top Socially Responsible Dividend Stock by Dividend Channel, ...

Canadian Dollar Trust (FXC) Shares Cross Above 200 DMA
Wed, Aug 27, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Canadian Dollar Trust ETF (FXC) crossed above their ...

GDX, GG, ABX, NEM: ETF Inflow Alert
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: GDX, GG, ABX, NEM Exchange traded funds (ETFs) trade just ...

FXU, POM, TDS, GXP: Large Outflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: FXU, POM, TDS, GXP Exchange traded funds (ETFs) trade just ...

QQQ, AAPL, MSFT, GOOG: Large Inflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: QQQ, AAPL, MSFT, GOOG Exchange traded funds (ETFs) trade just ...

KRE, CIT, UBSI, HBAN: Large Inflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: KRE, CIT, UBSI, HBAN Exchange traded funds (ETFs) trade just ...

iShares Russell 1000 Value ETF Experiences Big Inflow
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: IWD, GE, JNJ, WFC Exchange traded funds (ETFs) trade just ...

CURE: Large Outflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: CURE Exchange traded funds (ETFs) trade just like stocks, but ...

IJH, URI, SLG, HSIC: Large Inflows Detected at ETF
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: IJH, URI, SLG, HSIC Exchange traded funds (ETFs) trade just ...

VUG, FB, AMGN, AXP: ETF Inflow Alert
Wed, Aug 27, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: VUG, FB, AMGN, AXP Exchange traded funds (ETFs) trade just ...

11.6% of FTHI Holdings Seeing Recent Insider Buys
Wed, Aug 27, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust High Income ETF (FTHI) ...

MO a Top 25 Dividend Giant With $3.11B Held By ETFs
Wed, Aug 27, 8:14 AM ET, by ETF Channel

Altria Group Inc (MO) has been named as a Top 25 ''Dividend Giant'' by ETF ...

Analog Devices a Top Socially Responsible Dividend Stock With 2.8% Yield (ADI)
Wed, Aug 27, 8:14 AM ET, by ETF Channel

Analog Devices, Inc. (ADI) has been named a Top Socially Responsible Dividend Stock by Dividend ...

PowerShares Cleantech Portfolio (PZD) Shares Cross Above 200 DMA
Tue, Aug 26, 3:54 PM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares Cleantech Portfolio ETF (PZD) crossed above their ...

Navient Achieves #139 Analyst Rank, Surpassing Dover
Tue, Aug 26, 11:54 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

OIH, SLB, NOV, SDRL: Large Inflows Detected at ETF
Tue, Aug 26, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: OIH, SLB, NOV, SDRL Exchange traded funds (ETFs) trade just ...

FCG Makes Bullish Cross Above Critical Moving Average
Tue, Aug 26, 10:54 AM ET, by ETF Channel

In trading on Tuesday, shares of the First Trust ISE-Revere Natural Gas Index Fund ETF ...

NGE Crosses Critical Technical Indicator
Tue, Aug 26, 10:54 AM ET, by ETF Channel

In trading on Tuesday, shares of the MSCI Nigeria ETF (NGE) entered into oversold territory, ...

10.1% of FYC Holdings Seeing Recent Insider Buys
Tue, Aug 26, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust Small Cap Growth AlphaDEX ...

Home Depot a Top 25 Dividend Giant With 2.07% Yield (HD)
Tue, Aug 26, 8:34 AM ET, by ETF Channel

Home Depot Inc (HD) has been named as a Top 25 ''Dividend Giant'' by ETF ...

Shares of HYXU Now Oversold
Mon, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the iShares Global ex USD High Yield Corporate Bond ...

Proshares USD Covered Bond Breaks Above 200-Day Moving Average - Bullish for COBO
Mon, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the Proshares USD Covered Bond ETF (COBO) crossed above ...

Swedish Krona Trust (FXS) Enters Oversold Territory
Mon, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the Swedish Krona Trust ETF (FXS) entered into oversold ...

UPV Makes Bullish Cross Above Critical Moving Average
Mon, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the Proshares Ultra FTSE Europe ETF (UPV) crossed above ...

Kinder Morgan Moves Up In Analyst Rankings, Passing Mallinckrodt
Mon, Aug 25, 11:54 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

VDE, OXY, HAL, APA: ETF Outflow Alert
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: VDE, OXY, HAL, APA Exchange traded funds (ETFs) trade just ...

IJS, TQNT, THS, EPR: Large Outflows Detected at ETF
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: IJS, TQNT, THS, EPR Exchange traded funds (ETFs) trade just ...

VGT, CRM, CTSH, GLW: Large Inflows Detected at ETF
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: VGT, CRM, CTSH, GLW Exchange traded funds (ETFs) trade just ...

EDC: Large Outflows Detected at ETF
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: EDC Exchange traded funds (ETFs) trade just like stocks, but ...

iShares U.S. Consumer Goods ETF Experiences Big Outflow
Mon, Aug 25, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: IYK, MO, MDLZ, KMB Exchange traded funds (ETFs) trade just ...

IHE, BMY, LLY, PRGO: ETF Outflow Alert
Mon, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IHE, BMY, LLY, PRGO Exchange traded funds (ETFs) trade just ...

PRF, USB, TRV, PRU: ETF Inflow Alert
Mon, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: PRF, USB, TRV, PRU Exchange traded funds (ETFs) trade just ...

TWM: ETF Outflow Alert
Mon, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: TWM Exchange traded funds (ETFs) trade just like stocks, but ...

XME, AKS, X, STLD: Large Inflows Detected at ETF
Mon, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: XME, AKS, X, STLD Exchange traded funds (ETFs) trade just ...

18.1% of XOP Holdings Seeing Recent Insider Buys
Mon, Aug 25, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the SPDR S&P Oil & Gas Exploration ...

Wal-Mart Stores a Top Ranked SAFE Dividend Stock With 2.5% Yield (WMT)
Mon, Aug 25, 9:24 AM ET, by ETF Channel

Wal-Mart Stores, Inc. (WMT) has been named to the Dividend Channel ''S.A.F.E. ...

HCN a Top 25 Dividend Giant With $3.18B Held By ETFs
Mon, Aug 25, 9:24 AM ET, by ETF Channel

Health Care REIT Inc. (HCN) has been named as a Top 25 ''Dividend Giant'' by ...

ENOR Makes Notable Cross Below Critical Moving Average
Fri, Aug 22, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the iShares MSCI Norway Capped ETF (ENOR) crossed below ...

DSUM Makes Notable Cross Below Critical Moving Average
Fri, Aug 22, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the PowerShares Chinese Yuan Dim Sum Bond Portfolio ETF ...

Related videos | all videos »
  More articles:  1 2 3 4 5 6 7 next »

ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

Tax Reform And Dividend ETFs: Cause For Concern? | Self Directed Investor | Copyright © 2008 - 2014, All Rights Reserved

Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of over 1000 individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.