Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Mark Marcellus who wrote (16096)	1/7/2003 10:23:38 PM
From: Grommit	Read Replies (2) \| Respond to of 78594

Dividends. Big article in Wall Street Journal on preparing for the tax plan. They say the winning bets are high dividend stocks, cash rich companies and preferred stocks. But most preferred stocks have a redemption value and redemption or maturity date. That would cap the value of those securities. (Yes, they can trade above the redemption value, but not as time goes by.) So after initially nodding my head and thinking to unload my REITs and buy preferreds, I'm not so sure. Ignoring the issue that most securities are held in tax advantaged accounts --- If we think like economists.... people will bid up the price on dividend stocks until the yield is appropriate for the risk level. Which is where it is now! The only change is taxes. People will require the same yield after tax as they require now. And price adjustments will follow accordingly. So we're looking at a one time gain for dividend stocks, no one time gain for REITs, and a small gain for Preferred stocks. examples -- A dividend stock that sells for $10, and pays 5% (before tax), would yield around 3% after tax. So with no taxes, and requiring a 3% after tax yield, the price is bid up to $16.6. A nice 60% gain. However, if you have a $25 at maturity Preferred stock, and it is redeemable in 2005, and it's selling at $26, and paying 8% or $2 per year, the before tax yield is 6.9% to maturity. Tax it, and you get 4.1% net yield. To lower that yield to 4.1% (with no taxes), you need to bid the price up to $26.80. That's only a 3% windfall in price apprciation -- 80 cents. Not very much. I think the journal is missing something -- or am I? thanks grommit related issue -- is there a way to economically convert (taxable) capital gains into (untaxed) dividends. Like buying a stock just before ex-dividend, then sell ex-div at the lower value (to get a capital loss), and pocket the dividend (tax free). Or maybe Mr. Market will adjust accordingly and the ex div stock drops will be smaller in the future. hmmm.