Experts: Investors Seeking Income Flock to Dividend Stocks

Friday, 10 Aug 2012 08:30 AM

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Dividend stocks are hot items amid today's times of low yields, especially among investors looking for income, experts say.

In the past 12 months, S&P 500 companies that pay dividends have outperformed non-dividend companies by more than 9 percentage points, USA Today reported.

"A dividend is a check in the mail. Investors are looking for income," said according to Howard Silverblatt, senior index analyst at S&P, USA Today added. "And there are not a lot of places to get it."

Low interest rates have made fixed-income investments dull investment options, while big companies full of cash are paying attractive dividends to shareholders these days.

Interest rates on money market funds and one-year certificates of deposit are less than 1 percent, while the yield on the benchmark 10-year U.S. government note is hovering around 1.65 percent, a near record low.

General Electric, meanwhile, is sporting a 3.4 percent yield, while pharmaceutical giant GlaxoSmithKline yields 5.1 percent these days.

Dividend stocks, however, are facing issues on their own.

At the end of the year, a string of tax breaks expire and other taxes are set to rise, including those on investment income, which would apply to money earned from dividends.

Meanwhile, inflation rates remain low and recovery tepid, and Federal Reserve officials have said conditions meriting rock-bottom interest rates are due to stick around through 2014, which would make dividend-paying stocks attractive.

Investors, therefore, face a quandary: stick with dividend stocks and pay higher taxes next year or invest in government debt and earn dismal interest rates that won't even keep pace with tame inflation rates.

"For investors, this creates something of a Catch-22," U.S. News & World Report said in a recent analysis.

"On the one hand, with the expiration of the Bush tax cuts in 2013, the top tax rate on dividend income could soar to 39.6 percent. In other words, dividends would be taxed as ordinary income," the magazine reported.

Dividend income is currently taxed at 15 percent.

"At the same time, dividends have long been a safe haven when fears of slow growth and deflation loom on the horizon. That is because their steady stream of income has traditionally provided a much-needed buffer in times of economic malaise."

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