The Growing Case For Dividends --- More Details Emerge on White House Plan, Offering Added Boost for Stocks with High Payouts
DIVIDEND-PAYING stocks are already on a roll, and the Bush administration's plan to cut individual taxes on dividends would give them another boost.</br></br>While reaction on Wall Street was muted yesterday because of the plan's uncertain future, several details emerged. At a minimum, an administration plan would likely provide tax relief for dividends not only on common stock but on preferred stock as well. Dividends passed on to holders of mutual funds, often in the form of additional shares of the fund, would also get taxed less. However, dividends paid by many small and family-owned businesses probably wouldn't be affected.</br></br>For investors, the likely inclusion of preferred stock is welcome news. Preferred stock, while technically stock, carries a high dividend and functions almost like a bond in people's portfolios, providing a steady stream of regular income. While preferred stock is often held by institutions, reducing the tax would spur more individual investors to buy it -- especially given its large dividends.</br></br>Proposals are being floated in Washington about how best to accomplish the administration's goals. One approach is eliminating the dividend tax altogether. Another would reduce the tax rate on dividends to equal that on capital gains, typically 20%. Currently, dividend payments are taxed at ordinary income rates, as high as 38.6%. Yet a third possibility would exempt some amount of dividends, say, $1,000, from taxes.</br></br>If the proposal becomes law, corporations would come under increasing pressure to change their approach to dividends. Companies that already have dividends would be pushed to boost them. And companies that have never paid dividends, such as Microsoft, Dell Computer and Cisco Systems, would face pressure to start paying them.