As part of the so-called fiscal cliff on Jan. 1, a two-year extension of lower dividend tax rates under 2003’s Jobs Growth and Tax Relief Reconciliation Act is set to expire. If unresolved, the tax rate on dividends will jump to 43.4% from 15%.
Anticipating that, sectors that traditionally pay high dividends, like utilities and telecom, have taken a beating since the beginning of the fourth quarter. On average, telecom stocks are down 8% for the quarter-to-date, while utilities are down 6.3%. In comparison, the S&P 500 is down 3.7%.
That’s unusual, said Eric Slover, a U.S. equities strategist at Barclays, who points out that high-yield stocks are generally more defensive in a down market.
“It looks like there’s an overreaction,” Slover said, noting that the same thing happened when utilities stocks jumped in 2003 for about a month when dividend tax rates were lowered. “So now we have an overreaction going the other way,” he said.
