BOSTON ( TheStreet) -- If the tax rate on dividends spikes at the end of the year, millions of investors will share in the pain.Dividends are taxed at 15%, and the Obama administration has signaled -- most recently by Treasury Secretary Timothy Geithner to CNBC's Larry Kudlow -- that it supports a relatively modest increase, to no more than 20% at the top rate. But inaction by Congress would mean that, in 2011, qualified dividends will no longer be taxed like capital gains, but instead treated as ordinary income at a rate that would top out at 39.6%. Among those leading the charge against that scenario are utility companies, many of which offer the fattest yields. In 2009, companies such as PG&E ( PCG), Duke Energy ( DUK) and Exelon ( EXC) paid out $18.5 billion in dividends.
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If, as some warn, the higher tax curtails investment and lowers cash flow to cover capital-spending plans, companies could face the choice of cutting dividends and diverting the proceeds for other needs. It would not be unheard of. In fact, during the past two years, many companies have reduced or suspended dividend payments due to the recession or sector-specific woes. Among them: JPMorgan Chase ( JPM), Wells Fargo ( WFC), Capital One ( COF), General Electric ( GE), Honda ( HMC), Ford ( F) and Toyota ( TM)Toyota. In 2009, S&P 500 member companies trimmed dividend payments by $52.6 billion. In turn, retirement plans and mutual funds would have smaller gains to reinvest. If the lure of quality dividend payments is diminished, investors may turn away from specific stocks, further eroding returns. -- Reported by Joe Mont in Boston.