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Ignore Bush's Dividend Plan ... for Now
by Steven Goldberg

There is only one thing you should do to prepare for President Bush’s recent proposal to exempt dividends from income taxes: Nothing.

Why? Start by taking a look at the fine print in the Bush proposal.

First, it doesn’t exempt all stock dividends from personal income taxes. It exempts dividends only to the extent that issuing companies have paid corporate income tax.

The idea, after all, is to get rid of “double-taxation” of corporate dividends. So the Bush plan only exempts dividends of companies paying corporate taxes. Corporate tax loopholes have become such a way of life that many companies pay little or nothing in corporate income taxes.

Second, if a company pays taxes on its earnings and doesn’t pay out those earnings in dividends, you’ll still be able to claim a tax break under the Bush proposal.

Investors in such companies will get a partial exemption from capital gains taxes when they sell their stock.

So companies that are sitting on huge piles of cash, such as Dell, Cisco and Oracle, will have little added incentive to start paying dividends. (Microsoft has announced it will start paying a dividend.) And other companies will have little incentive to raise existing dividends, if the Bush plan becomes law.

Wait for revisions

Finally, the Bush plan is just that -- a plan.

The details of the proposal haven’t yet been finished, nor has it been sent to Congress, where Democrats and some moderate Republicans, are attacking it as fiscally irresponsible and a tax break for the wealthy.

It would take six months or more to convert the $674 billion proposal into law. With that amount of time, changes aren’t just likely -- they’re certain.

“The president’s proposal should be viewed as an initial bargaining position,” says Tobias Levkovich, a Smith Barney strategist.

At the end of the day, Bush may well win a partial exclusion of dividends from taxes. But he’s unlikely to get a complete exclusion. And it’s anybody’s guess what the details of the final law will look like.

Six solid dividend payers

None of this is to say investors should ignore dividends.

Dividends have traditionally accounted for 40% of investors’ returns from stocks. Dividends are rising now, and dividend-paying stocks have beaten non-dividend-paying stocks the last three years.

When a company starts paying a dividend, or hikes its dividend, it means it has confidence it can continue to earn enough money to pay that dividend. A dividend is cash -- it leaves no room for accounting tricks.

In “Show us the Money,” in the January issue of Kiplinger’s Personal Finance, we recommended six dividend-paying stocks you might consider:

Associated Banc-Corp (VZ).