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The impact of the “Fiscal Cliff” or $600 billion in spending cuts and increase in tax rate on dividend income and capital gains will take its effect from the beginning of 2013 if concrete measures are not taken to avert it. However, Republicans and Democrats still continue to wrangle about ways to find a solution.

Consequently, several companies are contemplating dividend hikes, special dividend and early payouts in light of a probable rise in dividend tax rate from the beginning of next year. These measures are taken to relieve shareholders from the burden of higher taxes. After all, an ounce of prevention is worth a pound of cure.

The tax rate could go up to 43.4% (39.6% top ordinary tax rate + 3.8% Obama’s Medicare surcharge tax on investment income) from the current 15%.

The “Jobs and Growth Tax Relief Reconciliation Act of 2003” is set to expire and renewal of the Bush-regime lower tax rate seems a remote possibility as of now. Thus, companies need to decide if they are ready to dole out dividends now or be prepared to face the brunt of a likely hike in dividend tax rate.

However, the companies have already taken certain shareholder-friendly moves sensing the uncertainty revolving around the economy.

Costco Wholesale Corporation (COST - Analyst Report) declared a special dividend of $7.00 per share, amounting to approximately $3 billion to be financed from the proceeds of the $3.5 billion debt-offering. Dillard's Inc. (DDS - Analyst Report) declared a special dividend payout of $5 per share, and Walt Disney Co. (DIS - Analyst Report) hiked its annual dividend by 25%. Wal-Mart Stores Inc. (WMT - Analyst Report) will pay its regular dividend on Dec 27, ahead of its scheduled date of Jan 2, 2013.

Las Vegas Sands Corp. (LVS - Analyst Report) announced a special dividend of $2.75 per share. Wynn Resorts Ltd. (WYNN - Analyst Report) rewarded its shareholders with a special dividend of $7.50 per share in its recently concluded third quarter. Coach Inc. (COH - Analyst Report), famous for women's handbags, would also pay its quarterly dividend of 30 cents a share on Dec 27, ahead of the scheduled date of January 2, 2013.

Oracle Corporation (ORCL - Analyst Report), the software maker, will pay dividends for the last three quarters of fiscal 2013 together in advance, aggregating 18 cents a share, on Dec 21. The McGraw-Hill Companies Inc. will pay a special dividend of $2.50 per share on Dec 27. The electronic products retailer, Best Buy Co. Inc. (BBY - Analyst Report) will now pay its quarterly dividend of 17 cents on Dec 31, two days ahead of its scheduled date.

Conclusion

We believe that if higher dividend tax rates take shape, it will compel investors, who have lately gone overweight on dividend-paying stocks, to reshuffle their portfolios and sell those stocks to avoid paying inflated tax in 2013. Moreover, it is very likely that consumer confidence would also be dented, which the retailers definitely don’t want at the present juncture.   

The decision makers should reach a consensus that should not only benefit the economy but investors too. Keeping our fingers crossed...

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