Lower federal tax rate on stock dividends helps retirees

From David L. Hauser, Duke Energy chief financial officer:

Families are struggling through historic price increases for fuel, groceries and other staples of everyday life.

Congress should not add to this burden by failing to extend the lower federal tax rate on qualified stock dividends. If legislators fail to act and let the provision expire in 2010, the federal tax rate on qualified stock dividends will increase significantly. It may seem premature to raise this issue now, but Barack Obama, John McCain and Congressional candidates are campaigning for the upcoming election. Now is the perfect time to demand their support on such an important issue.

A recent Edison Electric Institute analysis prepared by Ernst and Young examined federal tax returns and found that the lower dividend tax rate benefits a broad spectrum of Americans who own stock in utilities and other dividend-paying companies.

These investors are not simply “the idle rich.” According to the EEI analysis, low to middle income investors and those who are either retired or close to retirement are attracted to utility stocks for their above-average dividend yields and lower risk tolerance. In fact, 64 percent of the federal tax returns from investors that receive qualified dividends from direct utility investments were filed by those 65 or older; 68 percent had income of less than $75,000; and 42 percent had income of under $25,000.

Duke Energy's annual meeting is heavily attended by retirees who depend on their Duke Energy dividend payout to help cover their monthly bills. We are sensitive to their concerns. Candidates for public office should be as well.

Utility stocks traditionally have been havens for investors both during difficult economic times and as a conservative, long-term investment. These stocks tend to pay relatively high dividend rates and have lower volatility compared to other corporate equities.

Dividend-paying utilities included in the S&P 500 pay their shareholders an average of 50 percent of their profits, with an average dividend yield of approximately 4 percent. This is much higher than many other non-utility sectors.

Duke Energy exceeds both of those average measures. In 2007, we paid shareholders approximately 70 percent of our profits, and have a current dividend yield of around 6 percent.

The failure by Congress to extend this important tax relief will affect the shareholders of utility stocks in two significant ways – their stock prices will be lower and they will pay more in federal taxes.

In the end, dividend-paying stocks and their investors would suffer. For instance, if the lower federal tax rate for qualified dividends is not extended and increases to ordinary rates, Duke Energy shareholders will lose up to 20 percent of their after-tax return from our dividend payments.

We are all facing difficulties in this uncertain economic environment. Congress should do everything in its power to help investors who own dividend-paying stocks make ends meet, and that can start by ensuring that a key tax relief gets extended. These companies are the backbone of our economy, and the dividends paid to shareholders have a direct impact on millions who rely on the dividends to maintain their standard of living.