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The Oxford Club Associate Investment Director Marc Lichtenfeld on the impact on dividend stocks of a potential increase in the dividend tax rate.
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What's expected and stock's dividend stock investors are facing a major tax hike if we follow that fiscal cliff.
That means if congress does nothing.
The dividend tax rate will jump from 15% to 39.
Point six percents.
But will that be the death of dividend income -- -- mark within felt.
He's looking at the director of the Oxford club I'd venture -- -- Marc welcome.
Your answer is no especially given the rate and the pace of companies are seeing increased their dividends correct.
McCracken thank you for having me -- yeah and in fact I don't think that we're gonna see any problem with dividend stocks set off for two reasons one.
There's no historical precedent.
-- that shows that stocks underperformed -- dividend paying stocks underperformed during higher tax environment.
But the other important reason.
Does that bring income investor there's really nowhere else to put your money right now you know bond rates are so low and if you wanna go to let's say a corporate.
That the important thing to remember about bonds are that bonds will actually destroy your buying power.
Over the next several years and what I mean by that is as inflation goes higher.
You're receiving the same amount of income from the bond -- year after year it's like working.
And never getting a raise whereas if you invest in a dividend paying companies particularly one that raises its dividend.
-- you're getting a raise every year and you're keeping up with inflation.
Hopefully outpacing it and actually -- increasing your buying power.
22 -- point there your point there what about this theory that companies are increasing dividends faster.
To prepare investors and it he's -- ahead of this possible tax increase.
Again you know -- feeding into your point there that you want to -- every year.
Yeah I think that is -- you're probably seeing little bit higher boost this year to take advantage of the lower tax rates in case.
They go up next year.
But for the companies that have that track record now so we look for for companies -- -- perpetual dividend raisers companies -- -- raising the -- year fear that 10203040.
Year track records.
-- raising the dividend.
I don't think it's gonna it's gonna move the needle that much one way or the other on these companies.
These are exit give us some examples.
You say you -- in -- of them -- yes -- because the tax deferred tell me more about that plane.
-- some master limited partnerships are penalties.
Our our companies are usually energy companies.
-- their partnerships that most of that income or dividend income is actually tax deferred.
But I do want to caution investors -- -- and unfamiliar penalty is definitely -- your tax advisor first because our some consequences that you need to be aware of but one MLP that I really like is Brookfield infrastructure partners BIP is the symbol.
And they're not an energy -- there actually a global infrastructure play they've got businesses all over the world they've got railroads in Australia told the toll roads in Chile.
They've got power transmission lines in the Americas.
-- it's a really need global infrastructure company.
That's very diversified has a four point 3% yield again most of that will be tax deferred.
And they've been raising the dividend by about 14%.
Annually over the last five years.
OK appreciate that.
Look for what kind of -- you have to do what specific companies as a way to know what you predict when a company -- issue to raise dividend or raise dividends.
Well what -- look for but.
-- that track record that I mentioned I wanna see a company that has that at least five preferably ten years of raising the dividend.
But I also want to make sure that they can continue to raise the dividend and by that I look at the payout ratio that's the percentage of their net income.
Forecast -- that they pay out in dividends -- simply divide the amount of net income.
By the by the dividends paid.
And if I get to 75% or less -- know generally speaking.
That the dividend is safe and that there is there's a little bit of wiggle room even if -- earnings come down a little bit that they can continue to pay the dividend and raise it.
That makes perfect sense mark looked and felt thanks for joining us this afternoon.
-- thanks so much for having me.
