If you listen to the press, Taxmageddon is going to be a "nightmare" for dividend stocks.
There's only one problem with this scary story: It isn't true.
Of course, if we fall off the "fiscal cliff" taxes on dividends will revert to the full income tax rate of each individual taxpayer.
For the top taxpayers that means the top rate on dividends will rise from 15% to 43.4% if dividends become fully taxable again.
However, that's not as bad as it sounds, which is why dividend stocks will still remain the place to be in 2013.
Here's why.
First institutional holders of dividend stocks are taxed at their own rate so they did not benefit from the 2003 cut in dividend taxes. That means they won't suffer from a new increase.
And even among individual investors, many have their investments in IRAs or 401(k )s or other tax- deferred accounts. These holders will continue to receive dividends that won't be immediately taxed.
As for those on more modest incomes, perhaps being retired and living mostly on their dividend income, they will pay taxes only at 15%, 25% or 28%.
These are the thresholds which have been indexed for inflation since 2001, meaning the vast majority of tax payers will never get close to the 43.4% figure that makes for great scary headlines.
But it's not just all about tax rates. There are other reasons why savvy investors should continue to invest in dividend stocks in 2013.
The Biggest Reason To Invest In Dividends in 2013?
Barack Obama...
With President Obama now set to hold office for another four years, interest rates are likely to remain very low. In fact, Fed Chairman Ben Bernanke has said short-term rates will remain close to zero until the middle of 2015.
That's true even if Bernanke's current term of office ends in January 2014, since it's likely that if President Obama replaces Bernanke, his choice will be someone like Fed Vice-chairman Janet Yellen, who is equally committed to a low-rate policy.
So while we could easily see a decline driven by sluggish earnings combined with investor suspicion of the companies' accounting policies to knock prices down, dividend payers would fall much less. That's because their yields would increase and their attraction compared to bonds would become even greater.
Of course, you would need to buy solid companies which maintain their dividends, but that's a lot easier than finding the next growth stock.
That's why we went on a mission to find the very best high-yield, big growth opportunities right now. Let's break it down for you here...
Dividend Darling #1:
This Rock-Solid "Dividend Aristocrat" Has Increased Its
Dividend Every Year... Since 1957!
If you are looking for a steady stream of safe dividends in today's troubled markets, the list of "Dividend Aristocrats" is a good place to start.
Compiled and tracked by Standard & Poor's, Dividend Aristocrats are companies that have consistently increased their dividend payouts for 25 consecutive years.
Currently, there are 51 of them, including the 10 new Dividend Aristocrats added in 2012.
That means yield conscious investors have a choice of 51 solid companies with a reliable track record of providing guaranteed payments-even during volatile markets and down economic cycles.
If they're in a non-financial business, they also have the advantage of providing inflation protection, as their earnings will tend to increase with prices and their dividend increases should also keep pace.
Of course, these aristocrats tend to pay only moderate dividends, in the 2.5%-4.5% range, but that's still better than you get on bonds today, and if you're living on the income you are much better protected against a burst of inflation.
An excellent Dividend Aristocrat we recommend is Emerson Electric (NYSE: EMR) which has increased its dividend every year since 1957 and yields a solid 3.3%.
Its P/E ratio at 18.2 times is higher than we like, but that figure drops to a satisfactory 12.2 times when based off earnings in the year to September 2014.
If you look at Emerson's dividend record over the last 20 years, you will find that its quarterly dividend has risen from 8.62 cents in the third quarter of 1992 to 41 cents today.
That's a compounded growth rate of 8.0%, far above the average 2.5% consumer price inflation rate during this same 20-year period.
Granted, it may not sound like much in a single year--but over a 20-year period it's the kind of difference great fortunes are made of.
Dividend Darling #2
This Oil Stock Gives You Hefty Payouts... Minus The High Taxes
Another type of attractive investment is an energy-related Master Limited Partnership, or MLP. These MLPs not only offer a high-yield but can also benefit from inflation, as the price of oil rises.
The great thing about MLPs is they give you a way to earn higher yields... and pay lower taxes.
You see, due to an obscure law passed during the Reagan era, companies that service the oil and energy sector are allowed to funnel profits directly to their investors.
And because of a unique tax loophole, investors who hold MLPs for the long term can completely avoid paying taxes on 80%-90% of all of their earnings.
For MLP investors, those returns can be substantial.
First, there are the hefty "distributions" MLPs pay out year after year. In fact, several of the 50 companies in the benchmark Alerian MLP Index offer yields of 7.5% or higher.
Second, there is price appreciation which accounted for about 32% of the gain the index has generated since the end of 2007, according to Investing Daily.
Altogether, that gave the Alerian MLP Index a total return of 66.6%. Meanwhile, the S&P 500 Index lost 1.55% over the same period.
Our favorite for 2013 is Linn Energy LLC (Nasdaq:LINE), an oil and gas MLP with an attractive current yield of 8%.
Linn Energy engages in the acquisition and development of oil and gas properties in Mid-Continent, the Perriman Basin, Michigan, and California, and the Williston Basin in the United States.
Last year, the company reported operating 7,759 gross productive wells and has proved reserves of 3,370 billion cubic feet equivalent of oil and gas, and natural gas liquids.
Since its IPO in January 2006, LINN has consistently paid a distribution each quarter and has increased its quarterly dividend by approximately 115%.
Dividend Darling #3
This Unique Investment Pays 90% of Its Income To Investors
Like MLPs, Real Estate Investment Trusts, or REITS, offer investors the chance to collect some of the highest dividend yields available today. While also avoiding the onerous taxes.
REITs, came into existence because of U.S. President Dwight Eisenhower's "Cigar Tax Excise Tax Extension" of 1960.
Under this initially obscure tax provision, REITs can avoid corporate income tax, provided they invest in real estate-related assets and pay out at least 90% of their income in dividends to investors.
Mortgage REITs, as their name suggests, invest in residential and commercial mortgages.
Within the residential mortgage REIT category, some invest in agency-guaranteed REITs while others specialize in REITs that are not guaranteed.
For a top high-yield REIT, take a look at Agree Realty Corp. (NYSE: ADC), which owns a portfolio of retail outlets. It's up 15% (plus another 7% in dividend payments) since October of last year when we first recommended it to subscribers of Money Morning's Premium service called Private Briefing.
Editor's Note: Since August 2011, Money Morning Private subscribers have had a chance to make a small fortune with more than 50 winners in one of the rockiest markets in history. Go here to join them.
Wall Street analysts have suddenly become intrigued by the stock, and have slapped on "Buy" recommendations and target prices as high as $30 (33% above where we first recommended it).
We like it because it's not-heavily levered and it currently pays a very respectable 6.1% dividend yield.
A word of caution about REITS...
Some show yields that are literally too good to be true. That either means the company is paying out too much of its profits or cash flow to maintain the dividend, is employing some ill-advised financing strategy or is counting on the current-interest-rate anomaly to continue.
None of those three can be maintained for long. And you don't want to be the one who gets trapped.
That aside, we like MLPs and REITs because is these companies do not pay tax at the corporate level... and for that reason generally pay a higher yield.
Our real objection to paying individual tax on dividends is that most corporate dividends are paid out of income that has already been taxed at the corporate level, thus subjecting the income to onerous rates of double taxation (triple if you include state taxes) which may easily exceed 70%.
On the other hand-- unlike MLPs and REITs-- true operating corporations generally pay lower dividends, at a maximum of 5-6% range, for two reasons.
First, dividend payout rates have generally declined, because dividends give no benefit to holders of stock options, and so are less beneficial to company management than share buybacks.
Second, the combination of low interest rates and rising stock markets in the last 3-4 years have made even traditional dividend-oriented stocks yield much less than they used to.
So yes whatever the results of the "fiscal cliff" negotiations, dividend investors should continue pursuing these solid wealth- building strategies in 2013.