Business - Massachusetts Dividend outlook sunny, but tax cloud looms Congress expected to OK higher taxes on dividend income

By Mark Jewell AP Personal Finance Writer BOSTON (AP) -- Dividend investors are enjoying fatter payouts again, to the tune of $10 billion per year. The reason? More than one-quarter of companies in the Standard & Poor's 500 have increased their quarterly payouts over the past five and a half months, with just two cutting dividends. "It speaks to confidence in the strength of the underlying economy, and their ability to cover dividend payments without breaking the bank," S&P analyst Howard Silverblatt says. Yet there's a bump on the road to recovery from 2009, which saw the most cuts and fewest increases since S&P began collecting data in 1955. President Obama and Congress must shore up the nation's budget, and are almost certain to approve higher taxes on dividend income. In fact, investors in the top tax bracket could see dividend taxes more than double next year to 39.6 percent. That's up from the current 15 percent. For most taxpayers, a more likely scenario is a rate of around 25 percent, rather than 15 percent. Whatever increase Washington settles on, it will change the math for dividend-paying stocks and mutual funds with a strong dividend tilt in their portfolios. They're big draws for retirees and others who prefer a steady income stream, not just potential paper gains from appreciating stock prices. "If shareholders can only keep 60 percent of their dividend income compared with 85 percent, that's big," Silverblatt says. "It's not what you make, but what you keep." Still, market pros say the recent surge in companies reversing dividend cuts appears to have staying power. Here are five things investors need to know about dividend investing now: 1. It can only get better, and it is: When stocks tanked in late 2008, companies that had reliably raised quarterly dividends year after year suddenly cut them, opting to hold on to extra cash to ride out the recession. It was a matter of survival for many, especially bailed-out banks that had been among the most dependable dividend payers. This year's turnaround has been sharp, particularly last month. The list of 25 companies announcing increases in April included IBM, Exxon Mobil, Procter & Gamble and Johnson & Johnson. Still, Silverblatt predicts it will take until 2012 or 2013 to return to the 2008 S&P 500 dividend payout of nearly $248 billion. He projects a 5.6 percent increase this year compared with 2009. 2. Watch the taxman: Expect a quick end to the historically light tax bill that dividend investors have faced in recent years. Taxpayers in all but the lowest two brackets currently pay 15 percent on dividend income. President Obama proposed an increase to 20 percent. But a proposal that cleared the Senate Budget Committee last month would go further, with steeper increases for those in the middle tax brackets, and a 39.6 percent rate for those in the top rung. The House is expected to begin debate this month. The outcome: A $1 dividend paid this December would leave an investor with 85 cents after taxes. But in January, when the new rates would take effect, it could be closer to 70 cents or 60 cents, depending on your income. 3. Expect bank dividends to come back -- if you're patient. Financial stocks like Bank of America and Citigroup have historically been among the most reliable dividend payers, but that changed in 2008. The market meltdown hit bank stocks especially hard, and they cut dividends deeper than those in other sectors. Many financial companies are still restricted from paying dividends as a condition of receiving government bailouts. But even those no longer facing restrictions remain cautious. They're uncertain how tougher financial regulations will crimp their business, once a final package clears Congress. That might not happen until late this year, or longer. "Even though their balance sheets are healthy again, they're going to wait until the regulation battle is over," says Dan Genter, CEO of RNC Genter Capital Management, which runs the RNC Genter Dividend Income Fund (GDIIX). 4. Dividends could be safe harbors if the market drops again. Dividend-paying companies typically have more cash on hand and steadier income than growth-oriented companies that instead plow profits back into their operations. Think: Energy utilities vs. high-tech start-ups. Channing Smith, co-manager of the Capital Advisors Growth Fund (CIAOX), figures those advantages will protect dividend stocks if the economic recovery loses momentum. Dividend stocks haven't done as well as growth stocks since the market turned around in March 2009. That's a key reason why Smith's dividend-oriented portfolio has lagged most of its rivals over the past 12 months. But another downturn, or another market shock from debt troubles in places like Greece, could play to dividend stocks' strengths. "Their downside is much less than for the overall market," Smith says. "If there is another market drop, these stocks are already there." 5. Dividends are solid long-term. Even after 2009, dividend stocks still have a good long-term record. S&P 500 stock prices ended up the last decade slightly below where they started, after the dot-com bubble burst early on, and the more recent subprime mortgage mess sent stocks tumbling. S&P stocks lost an average 2.7 percent per year over the decade, while dividends returned nearly 1.8 percent. Going back several decades, dividends have normally accounted for one-third to 40 percent of the overall return of S&P 500 stocks, says Jim Boothe, manager of the Nuveen Santa Barbara Dividend Growth Fund (NSBAX). "Dividend stocks manage to do well in volatile markets," Boothe says. "The income component kind of cushions a portfolio." Published: Thu, May 20, 2010

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