This article was originally featured on Morningstar.

com, The Online Investor, National Real Estate Investor and two others May 10, 2012.

Dividend Stocks in Danger

Submitted by David Gratke on Thu, 05/10/2012 - 3:00pm Seemingly everyone is buying dividend stocks these days, seeking to improve their income with interest rates near zero. Great ideaunless Washington gridlock tanks the market and the economy. Plenty of people are flocking to stocks that pay nice dividends. An investment-grade corporate bond pays, on average, a full percentage point more than a 10-year Treasury, now yielding just under 2% yearly. Those that continually raise dividends are especially popular, because this tends to raise the stock price. In Corporate America, dividend-raising is in vogue. Of the 7,000 companies that report dividend activity toStandard & Poors, 1,953 increased payouts for 2011 (hiked outlays, extra payments or resumption of payouts), up from 1,729 in the year-prior period. The trend continues this year. For stocks, dividends are important because they pay you to own them. And dividends help performance. Of the7% inflation-adjusted returns U.S. stocks logged since 1926, 4% was from dividends, 1% from earnings growth and the remainder from investors bidding up the share prices. Dartmouth Professor Kenneth French found the best-yielding stocks outpaced non-payout stocks by an annual 2.8% since 1927. That proved true all around the world, French discovered. And the outperformance happened with less risk: In 21 developed-country markets, the dividend stocks beat the non-payers with lower volatility. Interest rates will go up eventually, but given the weak economy, not soon. The Federal Reserve indicates it likely will keep rates low through 2014. Corporate bonds are paying lower yields these days, as a result. So dividends are looking mighty good.

Historically, the people who were saversdepending on certificates of deposit and Treasury securitiesno longer could afford to save due to low rates, and became stock investors. And they favor dividend stocks because these throw off cash. The dividend-yield seekers would be upset to know that their new favored investment could all go terribly wrongand soon. We are on the brink of a fiscal cliff that threatens to send their beloved stocks plunging. The cliff: About one-third of the U.S. tax code is set to expire at the end of this year. If Congress does nothing, the impact is $7 trillion in hiked taxes or lost revenue. The end of the Bush tax cuts mean people will pay more to the government. Most important for dividend investors, the top federal dividend tax rate would rise from 15% now to 43.4% in 2013. Estimates are that this would subtract 2% to 3% from the U.S. gross domestic product. The nations economy is in no position to endure that hit with its sub-3% annual GDP growth right now. Question: Are the new dividend stockholders capable of withstanding a large decline in their stock portfolios? I say no. David Gratke is chief executive officer of Gratke Wealth LLC in Beaverton, Ore. AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty. For instance, the rankings this week measure the number of clients whose income is between $250,000 and $500,000 with that advisor. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily. Topic: Investing Bonds Stocks