Business life: My finance news blog

Dividend investors are enjoying fatter payouts again, to the tune of $10 billion per year.

The reason? More than one-quarter of companies in the Standard & Poor’s 500 have increased their quarterly payouts over the past 5½ months, with just two cutting dividends.

But President Barack Obama and Congress are almost certain to approve higher taxes on dividend income.

In fact, investors in the top tax bracket could see dividend taxes more than double next year to 39.6 percent, up from the current 15 percent. For most taxpayers, a more likely scenario is a rate of around 25 percent, rather than 15 percent.

Whatever increase Washington settles on, it will change the math for dividend-paying stocks and mutual funds with a strong dividend tilt in their portfolios. They’re big draws for retirees and others who prefer a steady income stream, not just potential paper gains from appreciating stock prices.

Still, market pros say the recent surge in companies reversing dividend cuts appears to have staying power. Here are five things to know about dividend investing:

1. It can only get better, and it is: When stocks tanked in late 2008, companies that had reliably raised quarterly dividends year after year suddenly cut them, opting to hold on to extra cash to ride out the recession. It was a matter of survival for many, especially bailed-out banks that had been among the most dependable dividend payers.

This year’s turnaround has been sharp, particularly last month. The list of 25 companies announcing increases in April included IBM, Exxon Mobil, Procter & Gamble and Johnson & Johnson.

2. Watch the taxman: Expect a quick end to the historically light tax bill dividend investors have faced in recent years. Taxpayers in all but the lowest two brackets currently pay 15 percent on dividend income.

Obama proposed an increase to 20 percent. But a proposal that cleared the Senate Budget Committee last month would go further, with steeper increases for those in the middle tax brackets, and a 39.6 percent rate for those in the top rung. The House is expected to begin debate this month.

The outcome: A $1 dividend paid this December would leave an investor with 85 cents after taxes. But in January, when the new rates would take effect, it could be closer to 70 cents or 60 cents, depending on your income.

3. Expect bank dividends to come back — if you’re patient. Financial stocks like Bank of America and Citigroup have historically been among the most reliable dividend payers, but that changed in 2008. The market meltdown hit bank stocks especially hard, and they cut dividends deeper than those in other sectors.

Many financial companies are still restricted from paying dividends as a condition of government bailouts. But even those no longer facing restrictions are cautious. They’re uncertain how tougher financial regulations will crimp business.

4. Dividends could be safe harbors if the market drops again. Dividend-paying companies typically have more cash on hand and steadier income than growth-oriented companies that instead plow profits back into their operations.

5. Dividends are solid long-term. Even after 2009, dividend stocks still have a good long-term record. S&P 500 stock prices ended up the last decade slightly below where they started, after the dot-com bubble burst early on, and the more recent subprime mortgage mess sent stocks tumbling. S&P stocks lost an average 2.7 percent per year over the decade, while dividends returned nearly 1.8 percent.

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