Fiscal cliff diving with special dividends
Companies are making payments to shareholders ahead of anticipated tax changes next year.
Bill Tsotsos, Stock Traders Daily
As most everyone is aware, Jan. 1 is not only the start of a new year, it is the beginning of a new tax year when higher rates will go into effect as tax breaks expire at the stroke of midnight. The so-called "fiscal cliff" is anticipated to result in tax increases of around $500 billion or 2.7% of GDP.
There are also supposed to be spending cuts tied to these tax increases to reduce the deficit, but you know how illusory spending cuts in Washington D.C. can be. There you see it -- there you don't. We all just hope that does not hurt the stock market.
The risk you have when you take out $500 billion from the hands of individual consumers is, of course, recession.
Fed Chairman Ben Bernanke has been warning of this and urging politicians to come to some sort of agreement to avoid sending the economy into a tailspin. No politician, especially those facing re-election in 2014, wants "blood on their hands." They like their jobs.
No one is certain how the political negotiations are going to play out or even if some kind of a deal will be in place by year end, creating a certain degree of angst among investors trying to decide how much income to accelerate and expense to defer.
Many companies have decided to declare a special dividend prior to year end in anticipation of changes in the tax rates paid on "qualifying dividends" from a maximum of 15% to ordinary income tax rates, which themselves are facing rate hikes to a maximum marginal rate of 39.6%. Costco (COST) was the latest company to announce a special dividend, making it a record 103 companies that have announced they will pay a special dividend before year end.
Economic uncertainty since 2008 has caused many companies to accumulate cash, including technology giants like Microsoft (MSFT) and Dell (DELL). CEOs and CFOs are not sure whether it is the right time to invest in other companies, plants and equipment, or new hires based on the difficulty in forecasting likely economic scenarios. Flush with cash, the looming tax hikes have put these companies in the position of Santa Claus to their shareholders. It is an acknowledgement that waiting until 2013 will only increase the tax burden on shareholders. Ho-ho-ho. Take that Uncle Sam! (Microsoft owns and publishes Top Stocks, an MSN Money site.)
In the spirit of the holidays, it might not be a bad idea to remember your CPA and investment advisor. There is still time to buy a year-end dividend and thank them for bungee-cording you as you get tossed over the fiscal cliff.
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Traders might want to bite on BABA, but long-term investors have reasons to wait.
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