Still worth owning dividend-paying stocks?

With tax rates on dividends expected to go higher next year, financial advisers should start assessing the risk-reward ratio of owning dividend-paying U.S. companies, according to a report today by Howard Silverblatt, senior index analyst at S&P Indices. Tax cuts on dividend-paying U.S. companies have saved equity investors $275 billion over the last eight years, Mr. Silverblatt reported. Even limited to the S&P 500 company universe, investors have saved about $141 billion on dividend taxes since 2003, he wrote. But unless Congress decides this fall to extend the tax cuts, the maximum dividend tax rate next year will increase from 15% for qualified dividends to 39.6%, Mr. Silverblatt wrote. This tax increase constitutes a haircut that might cause some investors and advisers to rethink their investment strategies. “It's an excellent opportunity to examine portfolios,” Mr. Silverblatt said. “With dividend stocks, it's what you keep, not just what you make.” “At the individual holdings level,” Mr. Silverblatt continued, “it's a question of ‘Do you like the stock or not?' Taxes don't come into play there. But, if you're in the dividends for the income, you should also be considering bonds, municipals, annuities. It all comes down to a trade-off between risk-reward.” “If you are in dividends, you are still in the equity market, and you still have risk there. It's a question of how much risk do I want to have, for a lower reward.”