High-Dividend Stocks Costly as Tax Surge Looms: Chart of the Day

Stocks with the highest dividends are expensive enough that they may fall out of favor as an increase in taxes on payouts looms, according to David Bianco, Deutsche Bank AG’s chief U.S. equity strategist.

As the CHART OF THE DAY shows, the price-earnings ratio for the Dow Jones U.S. Select Dividend Index exceeds the Dow Jones Industrial Average’s P/E by 12 percent. The premium is close to a peak of 13 percent, reached in October 2011.

Higher-dividend stocks are “stretched,” Bianco wrote in a Nov. 9 report. The companies behind them pay out a relatively high percentage of earnings and have less chance for profit growth than others, he wrote.

Payouts made by companies in the Dow dividend index amounted to 77 percent of third-quarter profit, according to data compiled by Bloomberg. For the Dow industrials, the figure was 40 percent.

Utility and telephone stocks are vulnerable to increases in dividend taxes, the New York-based strategist wrote. Shares of some health-care companies and makers of food, beverages and other consumer staples may also suffer.

The highest tax rate is set to climb to 43.4 percent in January from 15 percent today. The potential surge stems from plans to start taxing dividends as ordinary income and to have the wealthiest Americans pay a 3.8 percent tax to help finance expanded health-care coverage.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net

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