The 2013 market situation appears to be very challenging. At best, a political solution to the U.S. fiscal cliff will emerge, although lawmakers may bandage the situation and kick the problem down the road. Still, several scenarios would appear to have a higher degree of certainty for investors, including long-term dividend issues. With interest rates low, and the (current) Federal Reserve promising to keep them there, income-seeking investors will continue to enjoy few choices: Bank CD rates are minuscule and longer-term bonds, whose rates also are low, require that owners hold until maturity or face principal declines when rates start to inch up. Yields remain relatively high. While actual dividend payments set a record in 2012, companies still are paying out just 34% of their profits versus an historical rate of 52%. Even if no issue changes its dividend rate through 2013, next year's payment will be 6% higher than 2012.
Taxes will remain the major issue. Some adjustment to the dividend tax rate will be made, with the potential for a 2013 modification being made retroactive. Regardless of the tax structure, even at the full 43.4% scheduled rate, dividends may be the only game in town for investors looking for current income. Expect some type of accelerated depreciation schedule to encourage companies to purchase new equipment and, potentially, hire workers. While congress will attempt to encourage companies to buy American, international trade agreements limit their ability. We expect some type of change from Congress, especially for smaller companies. S&P Dow Jones Indices also anticipates continuing declines in European sales that would put pressure on profits and reduce margins. Today, 46.1% of S&P 500 sales are foreign, with 11.1% coming from Europe."
Municipal Bond MarketOn the performance of the U.S. municipal bond market in 2012, JR Rieger, Vice President of Fixed Income Indices at S&P Dow Jones Indices says:
"Reaching historically low nominal yields, 2012 saw the municipal bond market continue as a flight to quality and income-generating asset class. But, relative to other fixed-income asset classes, municipal bonds have generated higher yields on a taxable-equivalent yield basis. Low supply of new issues versus high demand for tax-exempt, income-generating assets sustained an imbalance that pushed prices higher. High-yield municipal bonds saw yields decline the most and outperformed the general municipal bond market as income-driven investors pushed cash into municipal bond mutual funds. New municipal bond monetary defaults haven't approached some end-of-2010 apocalyptic projections.