Given the likelihood that tax rates on dividends, interest and capital gains may be increasing in 2013, many companies are announcing the payment of special dividends to shareholders ahead of the year-end deadline of December 31, 2012.
Currently dividends are taxed at a maximum rate of 15%. Some estimates show the maximum tax rate on dividends increasing to nearly 40%. While unlikely, an educated guess suggests that tax rates on dividends, interest and capital gains my go to nearly 24%, after the healthcare surtax.
Investors that want to take advantage of cashing in on special dividends by year end may look to investments that hold a basket of dividend paying stocks. There are some mutual funds that offer a dividend investment strategy and another to look at is the exchange traded fund (ETF) offered by WisdomTree. The WisdomTree Dividend ex-Financial Fund, ticker "DTN." The SEC 30-day yield for DTN is 3.99%.
ETF's have a few advantages over mutual funds. They typically have lower annual fees and they can be bought and sold like a stock so there is no short-term holding period like a mutual fund.
As of today, according to CNBC, companies have announced special dividends of over $22 billion to be paid prior to year end and thus receive the more favorable tax rate. Companies recently announcing special dividends include Coach, Costco, Las Vegas Sands, Westlake Chemical, Dish Network and many more.
If you are trying to take advantage of special dividends and don't want to guess what companies may pay them or do not want to buy individual stocks, a mutual fund or ETF that focuses on a dividend strategy may be right for you.
Before making any decision, be sure to discuss any changes in your financial plan with your financial advisor. You can find a fee-only advisor at the National Association of Personal Financial Advisors website.
Tom Taylor, CPA is a fee-only, independent Financial Planner and Certified Public Accountant and can be contacted at Chesapeake Financial Advisors or Taylor & Company in Towson, MD. Tom believes that the greatest benefit of planning includes incorporating tax strategies with financial planning. Tom’s clients receive both services in one advisor. He is a member of NAPFA and the MACPA and AICPA.