ETF.com Analysis

Beyond Special Dividends, Payout ETFs Loom

November 30, 2012
Share:

Special dividends are all the rage now, but what about yield in 2013?

Many investors are getting a special dividend treat in late 2012, and while that's exciting, it’s all about a changing tax picture.

And that means some investors are going to be faced with choices.

We generally hew to a buy, hold and rebalance sensibility here at IndexUniverse, so I’m not going to say that all these special dividends suggest the end is near or that dividend-focused ETFs ought to be avoided but, please, do be cautious and aware.

After all, tax issues are thorny, and should be taken seriously and thoughtfully—with professional advice.

As it stands, dividends are taxed at a rate of 15 percent, but if the U.S. were to lurch off the so-called "fiscal cliff" at the end of the year, the tax rate on those dividends could jump to as much as 40 percent.

One thing seems clear: Companies are looking to throw investors a bone by distributing many extra payouts either in the form of "special dividends" that were not previously scheduled or by shifting 2013 dividends into end-of-year 2012.

A total of 173 companies have announced special payouts this month—a 140 percent jump from November 2011—according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

To take a step back, I think dividends are already unduly punished by the tax man, and it could get worse very soon.

As a shareholder in a company, you are a partial owner, and in turn you own a share of the earnings that the company produces. The company is taxed on those earnings, and if they choose to return your earnings to you—the owner of those earnings—they are taxed again. Good for Uncle Sam; bad for investors.

For investors who depend on dividends for cash flow, that tax risk is material and, as I was saying, they really ought to speak with a tax professional to formulate a new coping strategy.

The rest of us, I suppose, can enjoy the treat! The extra dividends or early payouts are an unexpected consequence of our dysfunctional Congress.

Don’t forget though, there’s no such thing as a free lunch: Unless the economic recovery gains some serious traction, dividend yields in general will almost certainly start shrinking in 2013. Just don’t be surprised when it happens.

There is, however, some hope for dividend yields in 2013.

 

ETF.COM CHANNELS

Interested in China? Use our China ETFs Channel, library, and ETF screener.

Interested in oil? Use our oil ETFs channel, library and ETF screener!

ETF DAILY DATA

The oil and gas ETF saw net inflows of $135 million on Wednesday, April 27.

The top five issuers all saw net inflows into their exchange-traded products on Wednesday, April 27.

ETF.COM ANALYST BLOGS

By Drew Voros

With the broad equity ideas all taken, issuers look for thinner slices of exposure.

By David Lichtblau

How funds wash away capital gains through create/redeem process.

By Dave Nadig

End investors are the big winners; brokers—not so much.

By Dave Nadig

ETF industry petitions the SEC for market microstructure changes.

ETF INDUSTRY PERSPECTIVE

By Adam Patti

After a record-setting year in 2015, investors wonder what 2016 will hold.

By Sprott Asset Management

New fund’s underlying index targets equities sentiment on social media.

By Kristi Kuechler

Avoid taking unrewarded—or unintended—risks.