High-yield dividend portfolios in California face effective tax rates exceeding 50%, sharply reducing spendable income for top-bracket investors.
A $2 million dividend portfolio yielding 12% in ordinary income delivers just $120,000 after California’s combined federal, state, and net investment income taxes. The state’s 50%-plus tax rate on ordinary dividends erodes gross yields, leaving investors with less spendable cash than lower-yielding qualified dividends.
Portfolios built around qualified dividends, such as those from blue-chip stocks like Johnson & Johnson (JNJ), often outperform higher-yielding ordinary-income portfolios on an after-tax basis. A 3.5% qualified-dividend yield may provide more spendable income than a 10% ordinary-income yield for top-bracket Californians.
Investors benchmarking income strategies are advised to compare after-tax returns against the 4.5% 10-year Treasury yield, as a 5% ordinary-income yield may result in a negative after-tax spread.