Will Obama whack dividends?

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By Carolyn Bigda and George Mannes, Money Magazine

The new President will likely raise taxes on stock payouts. But the change won't come as fast or be as dramatic as was once feared.

During the campaign, candidate Obama and his economic advisers suggested that the top rate on dividend taxes could climb as high as 28% - a move that would have had a major impact on dividend investors. But under President Obama, families making more than $250,000 a year should expect the top dividend rate to go no higher than 20%, up only slightly from today's 15%.

"Going from 15% to 20% is a fairly gentle haircut," says Greg Valliere, chief political strategist for Stanford Financial Group, an investment research firm in Washington, D.C.

Even if you're in that high-income category, don't expect any change soon, since raising taxes in the midst of a deep recession is both politically and economically risky. "A tax hike on anybody right now is not a good idea," Valliere says.

It's more likely, he notes, that a dividend tax increase would come in early 2010 - perhaps tied to a bill overhauling estate taxes - or in 2011. Either way, says Valliere, the higher dividend tax rate is unlikely to radically remake the landscape for income investors.

But could the new administration affect the dividend-paying policies of certain industries? Given the steep drop in crude prices, the likelihood of a dividend-threatening windfall-profits tax on Big Oil has diminished.

Big Pharma may be another story, given Obama's interest in remaking health care. "A dividend is generally a sign of a mature business model," says Houston financial adviser Joe Birkofer. "For any industry that's going to go through a business model change - that dividend is going to be on the block."

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