Fear of 'Fiscal Cliff' Taxes Puts Chill on Dividend Stocks

The fear of higher taxes has put a chill on dividend-paying stocks, in what some analysts say could be an overreaction to the "fiscal cliff."

iStock

The Bush-era tax cuts on dividends and capital gains, to 15 percent, are in the cross hairs, as congressional leaders and President Barack Obama this week start work on reshaping the tax and spending components of the so-called fiscal cliff.

The cliff is the $607 billion expiration of a bundle of tax cuts and other programs, and the onset of automatic spending cuts that take place starting Jan. 1 if Congress does not act.

For dividend investors, a worst-case scenario for the wealthiest Americans would be that the upper income tax rate is returned to 39.6 percent, and dividends could then be taxed at that much higher rate, if the Bush tax cuts are left to expire.

For individuals earning $200,000 and couples earning $250,000, there is also the new 3.8 percent tax rate that comes as part of the Affordable Care Act on certain types of income, including dividends, capital gains and rental income. (Read More: 'Fiscal Cliff'—What Are the Options for a Deal?)