The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
Tis' the season for special dividends and one analyst said Monday that he expects more financial firms will be delivering investors such payments before the end of the year.
A number of companies have moved up their quarterly payout or issued a special end-of-year payment to protect investors from potentially having to pay higher taxes on dividend income starting in January.
Companies are reviewing their dividend policies now as the "fiscal cliff" looms. Since 2003, investors have paid a maximum 15 percent on dividend income. But that historically low rate will expire in January unless Congress and President Barack Obama reach a compromise on taxes and government spending. As it stands, dividends will be taxed as ordinary income in 2013, the same as wages, so rates will go up depending on which income bracket a taxpayer is in. For the highest earners, the dividend rate would jump to 43.4 percent.
Keefe, Bruyette & Woods analyst Frederick Cannon said in a research note that he believes tax rates on dividends will increase on Jan. 1 in almost all the fiscal cliff resolution scenarios. In other words, even if a fiscal cliff is averted, the compromise legislation will push dividend tax rates up over 20 percent in 2013.
As a result, Cannon expects further announcements going into year-end.
The analyst in October identified 15 financial firms that he expected would make special dividend payments. To date, seven of these firms have committed to special dividends. Another 11 financial firms that weren't initially identified have also announced such payouts. Cannon expects more financial firms will join these ranks in the remaining weeks of the year.
He still expects the following firms from his initial list are still likely to announce special dividend payments: CBOE Holdings Inc., CME Group Inc., Interactive Brokers Group Inc., OneBeacon Insurance Group Ltd., SY Bancorp Inc. and W.R. Berkley Corp. He also added the following firms to his list of possible special dividend payers: Cullen/Frost Bankers Inc., Fox Chase Bancorp Inc., GFI Group Inc., MarketAxess Holdings Inc., National Penn Bancshares Inc., Northwest Bancshares Inc. and SEI Investments Co.
The analyst noted, however, that the largest financial firms, those designated as systemically important, are precluded from such announcements as they do not have Federal Reserve approval
Shares of firms that have committed to special dividend payments have reacted favorably to the news. The shares of those still pending a commitment had a mixed result in trading Monday.
Shares of SEI Investments increased 17 cents to $22.18 by late afternoon and National Penn's shares added a penny to $9.49. Other stocks fell, including CBOE Holdings shares, off 29 cents to $29.69 and GFI Group, down a penny to $2.78. The broader markets fell slightly amid back-and-forth in Washington over the fiscal cliff, with financial stocks among the declining sectors.