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Andy Friedman: Dividend stocks headed for trouble

Pundit warns that tax increase could lead companies to buy back shares rather than boost payments to shareholders

May 22, 2012 @ 11:18 am

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Political pundit Andy Friedman, principal of The Washington Update, believes that taxes will likely be higher next year. That scenario, he said, means financial advisers should reevaluate their clients who are concentrated in one stock or who own a lot of dividend-paying stocks.

If Congress doesn't act, tax rates on dividend income will nearly triple, which will affect dividend-paying stocks in a variety of ways, Mr. Friedman told an audience at the Raymond James national conference in Orlando Tuesday.

For dividend stocks that also offer the chance of sizeable capital appreciation, a tripling of the tax rate will lead the issuing companies to stop hiking the payouts. Instead, Mr. Friedman says those businesses "will keep that money to buy back stock so shareholders get capital gains (instead),” he said. For companies that are bought primarily for the dividends, “the value of that stock will likely decline.”

If Mr. Friedman is correct, this could make life that much more difficult for advisers, many of whom have been struggling to find streams of income for clients. If dividends shrink or are suspended by scores of companies, advisers and their clients will have to look elsewhere for yield. In this low-rate environment, that won't be an easy task.

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