Dividend stocks have taken the investing world by storm, especially as income-starved investors have turned to their payouts as one of the only substantial sources of regular cash flow from their portfolios. But as the number of companies increasing their payouts and the amount of cash going from corporate coffers into shareholders' pockets are hitting all-time highs, the obvious question for dividend investors is how long the good times can last.
Why 2012 was a great year for dividends
S&P Dow Jones Indices released its quarterly look at the state of dividends in the U.S. stock market (link opens PDF file), and for the most part, S&P Senior Index Analyst Howard Silverblatt liked what he saw. All told, 2,883 companies raised their dividends in 2012, the most in any year the research firm has tracked back to 1999. With an 18% increase in cash dividend payments and an all-time high projected forward dividend rate, Silverblatt was enthusiastic about how 2012 went.
Moreover, Silverblatt believes that 2013 could be even better for dividends. Citing payout rates of just 36%, well below their historical average above 50%, he believes that regular cash dividend payments could hit another high in 2013. That's possible even despite the fact that many companies, including Buckle (BKE 2.17%) and Oracle (ORCL +4.74%), chose to accelerate dividend payments into the fourth quarter of 2012, thereby reducing their payouts this year.
How the fiscal cliff could support dividends
One concern that many analysts had coming into 2013 was the potential impact that a massive tax hike on dividend payments could have on stocks. In particular, with tax rates on dividends set to rise all the way to match ordinary income rates, high-income taxpayers could have seen dividend taxes almost triple.
In the end, though, the resolution that lawmakers agreed to kept increases on dividend taxes to a minimum. For taxpayers above the $400,000 and $450,000 income thresholds for singles and joint filers respectively, the same 20% rate that will apply to long-term capital gains also holds for dividends. Meanwhile, lower-bracket taxpayers will continue to enjoy the 15% maximum rates they currently have.
More important than the absolute level of the dividend tax rate is the fact that it enjoys no less preference than capital gains. In the past, when capital gains rates have been lower than tax rates on dividends, corporations have responded by emphasizing share buybacks as a more tax-efficient way of returning capital to shareholders. But since investors really appreciate dividend income in the current financial environment, the fact that there's no inherent advantage one way or the other points to the likelihood that companies will keep pushing dividends higher. Meanwhile, with the low rates having spurred more than $350 billion in tax savings for investors during their 10-year history, investors should appreciate the survival of lower dividend rates, even if they aren't quite as low for everyone as they were last year.
Watch out for land mines
What you need to remember, though, is that just because 2013 looks like it'll be a good year for dividends doesn't mean that every dividend stock will see gains. For instance, as Fool contributor John Maxfield pointed out last week, mortgage REITs, which have been some of the most popular dividend-paying investments over the past several years, aren't likely to boost their payouts this year. That's because the Federal Reserve and its QE3 focus on mortgage-backed securities has increased the price that mortgage REITs like Annaly Capital (NLY +0.83%) and American Capital Agency (AGNC +1.14%) have to pay to find suitable investments to make.
Still, for companies that have already established strong track records of dividend increases, 2013 should give them ample opportunity to extend their streaks. Already this year, Hormel Foods (HRL +1.37%) came through with its 47th straight year of higher dividend payments, and dozens of other companies will inevitably follow suit.
With tax laws still favoring them, dividends shouldn't suffer any adverse effects as long as the economy continues to recover at a reasonable pace and companies remain flush with cash. 2013 looks like it should be able to match 2012's dividend strength barring an unforeseen cataclysmic event.
