Every dividend investor loves the arrival of those quarterly distribution checks. But thanks to "Taxmageddon 2013" those checks could get a whole lot smaller.
As things currently stand - with higher tax brackets, no extension of the Bush-era tax cuts and the addition of new levies on higher-income payers to fund Obamacare - the tax bite on some dividend payments could rise from as little as 15% to as high as 43.4%.
That's dramatically higher than the possible hike in capital gains we discussed in Part One of our series on the 2013 tax outlook, which ran last Friday. By comparison, scheduled tax-law changes will increase taxes on long-term profits from 15% to 23.8% for some taxpayers.
Under the current tax laws, dividends received in 2012 are taxed in one of three ways:
- Qualified dividend income - The concept of "qualified" dividends was created by the original Bush tax cuts. It allows dividends received from domestic U.S. companies and certain foreign corporations to be taxed at the recipient's long-term capital gains rate, which is capped at 15% in 2012.
- Qualified dividends from funds - As an extension of the individual preference, qualified dividend income received by mutual funds and exchange-traded funds (ETFs), and passed on to fund shareholders, is also taxed at the individual's maximum long-term capital gains rate of 15%.
- Ordinary dividend income - Non-qualified dividends are taxed as ordinary income to the recipient, meaning they will be taxed at marginal rates ranging from 10% to 35% in 2012.
The Potential Consequences of Taxmageddon 2013First, unless Congress acts before the end of the year to extend the Bush tax preferences, the concept of "qualified" dividends will disappear for both individual stock owners and holders of fund and ETF shares. That means all dividend income will again be taxed at ordinary income-tax rates.
Second, marginal tax rates for all individuals except those in the current 15% bracket (couples earning between $17,400 and $70,700 in 2012) will be increased in 2013. The lowest bracket will jump from 10% to 15%, and all other brackets will increase by 3% except for the top bracket (individuals or couples earning $388,350 or more), which will rise from 35% to 39.6%.
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Beat Ben Bernanke with These Juicy Double-Digit Yields
With the economy beginning to stall, Ben Bernanke's war on the nation's savers rolls on.
From his promise to keep the Fed funds rate near zero through late 2014 to his efforts to push ten-year note yields even lower, the Fed Chairman is a saver's worst nightmare.
You see, in Ben's world, the safety of money in the bank earning a reasonable interest rate is a dangerous thing.
It's why folks with savings have been virtually forced into the market these days in search of higher yields.
One place where income investors can find them is in closed-end funds.
A few of these funds even pay juicy double-digit yields -- like the one my Permanent Wealth Investor subscribers have earned 20% on in two years.
But here's the best part. You can actually buy closed-end funds like these on sale.
Let me explain.
Buying Closed-End Funds at a DiscountDeveloped in the 19th century, closed-end funds are the oldest type of mutual fund. If you understand the idea behind a mutual fund, then understanding a closed-end fund is easy.
In essence, they are the same thing- pools of money controlled by a professional money manager.
However, in contrast, a typical mutual fund is also what's known as an open-ended fund.
This means that the fund itself can issue as many shares as it needs to meet the demand on any given day. So the total number of shares in this type of fund isn't fixed at all-hence the term open ended. Shares are added as needed.
As a result, the cost of any share in one of these funds is always bought or sold at its current Net Asset Value (NAV). That's why shares of open-end funds don't trade per se on the exchanges.
A closed-end fund, on the other hand, is totally different. Unlike an open-ended fund, closed-end funds issue a limited number of shares. That means the number of shares outstanding is fixed.
So closed-end funds actually trade on an exchange like a stock, and are bought or sold minute-by-minute with a price driven by market sentiment.
That means that just like a stock, shares may trade at a premium or discount to their net asset value. That's a key difference, and why I say closed-end funds can be bought on sale.
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Stock Market Today: What Investors Can't Miss
Companies making headlines in the stock market today include Dell (Nasdaq: DELL), Johnson & Johnson (NYSE: JNJ), and JPMorgan Chase (NYSE: JPM).
After Tuesday's closing bell Dell (Nasdaq: DELL) gave shareholders good news: it will begin paying a dividend later this year.
The struggling tech company expects to pay quarterly cash dividends of 8 cents per share on all common stock starting during the third quarter of this year.
Using Tuesday's closing price of $11.97 as a benchmark would give Dell a dividend yield of 2.7%, higher than the average yield of the stocks in the S&P 500.
Dell's CFO Brian Gladden hopes this move can turnaround the beleaguered company whose stock is trading well below its 52-week high of $18.36.
"The payment of a quarterly cash dividend to Dell's shareholders adds another element to our disciplined capital allocation strategy," Gladden said.
Dell stock was up more than 4.5% in early trading Wednesday.
Johnson & Johnson (NYSE: JNJ) announced after market close Tuesday that it will be able to complete its acquisition of Swiss medical device maker Synthes on Thursday, much earlier than expected.
JNJ initiated the $19.7 billion deal, its largest ever, in April 2011. The purchase will make JNJ a prominent player in the orthopedic surgery business. Synthes also offers a strong presence in emerging markets like Russia, China and India.
In a turnaround of expectations JNJ stated that the deal will actually add 3 to 5 cents per share to its annual earnings. Earlier projections by the company stated the move would trim up to 22 cents off of its profits.
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The Safe, Sure Road to a Golden Retirement
It has been called the "royal road to riches."
Starting with just $10,000 and a small monthly contribution, any investor can use this method to create their own golden parachute - a million-dollar retirement portfolio.
All you need is time.
Time. That is something nobody seems to have anymore - or really appreciate.
But at 48 years old, I understand how 30 years can slip by in an instant. It may seem like forever, but it's not.
Instead, today it's all about the fast money. In the market, out of the market... this stock, that stock. Nobody has the patience to ride out the rough spots anymore.
However, there is one thing that never changes in the investment world: When you buy solid companies and reinvest the dividends you can build true wealth.
The best part is you'll never have to rely on Social Security to fund your golden years.
Of course, seasoned income investors have known this for years. That's why the truly rich don't spend their days glued to the financial news.
In this style of investing, less truly is more.
Because the biggest factor behind this well-worn strategy is time itself and time never fails.
The Most Powerful Investment Strategy of All-TimeThe secret to this approach is in the compounding effect that Albert Einstein once called "the most powerful force on earth."
It's the safe, sure road. And anybody who tries it can become a millionaire if they are smart enough to stick with it.
In fact, this force is so powerful that I think the government is deliberately keeping it from you.
I say that because if the masses actually knew the income this compounding approach could deliver, they would immediately demand an end to Social Security as we know it.
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The Best "Buy" of the New Dividend Aristocrats
If you are looking for a steady stream of safe dividends in today's troubled markets, the list of "Dividend Aristocrats" is a good place to start.
Compiled and tracked by Standard & Poor's, Dividend Aristocrats are companies that have consistently increased their dividend payouts for 25 consecutive years.
Currently, there are 51 of them, including the 10 new Dividend Aristocrats added this year.
That offers yield conscious investors a choice of 51 solid companies with a reliable track record of providing guaranteed payments-even during volatile markets and down economic cycles.
"The problem with going for capital growth is that you very often don't get it, and then you've got nothing - the investment just sits there," said Money Morning Global Investing Specialist Martin Hutchinson.
"Dividends" Martin says, "are easy."
Not only are they easy, they're also increasing.
Dividends on the Rise in 2012Standard & Poor's reported that dividend increases for all their indices in 2011 almost doubled the dividends paid in 2010.
Total dividend increases hit $50.2 billion last year - an 89.2% rise over 2010's dividend increases of $26.5 billion - and are expected to climb even higher in 2012.
That's welcome news for investors searching for steady income sources in a zero-growth environment.
Few other assets - especially bonds - are expected to deliver an increased payout this year.
"With 10-year Treasury bond yields below 2%, bonds just don't give you the income they used to," said Hutchinson. "Dividend stocks can give you a better yield than bonds, and if you pick the right ones, will provide both protection against inflation and a chance to share in global economic growth. While they'll fluctuate with the market, dividend stocks of attractive companies are thus really a three-fer."
Dividend Aristocrats even go a step further than ordinary dividend stocks because of their lengthy payout history.
But before you dive into investing in these Dividend Aristocrats, the list needs some scrutiny.
Even though all 51 Aristocrats are known for increasing dividends, not all of them make for great investments in today's market.
"All you have to do is figure out which companies are run by sharpies - and are paying dividends out of capital - and which companies have genuinely solid business models that aren't going away," said Hutchinson.
In fact, there's only one of the freshly-minted Aristocrats that you should add to your portfolio right now.
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Four Stocks to Avoid At All Costs
If you're like most investors, you probably spend most of your time searching for the "next" Apple Inc. (Nasdaq: AAPL) or next Google Inc. (Nasdaq: GOOG) - in other words, the next big winner.
But finding winners is only part of the equation.
If you're looking to build real wealth, you need to avoid the really big losers - like the "next" Enron, or next Lehman Brothers Holdings Inc. (PINK: LEHMQ).
Portfolio killers like those are the stocks to avoid at all costs.
Let me explain ...
How to Win By Not LosingDuring my years as a global merchant banker, advisor to governments, financial-news editor and trading-service specialist, I've time and again seen the big losses that can result from arrogant executives (Enron), greed-driven strategies (Lehman) and other investments gone wrong.
But what most investors don't understand is that the fallout from these losses reaches far beyond the losses themselves. You see, that's money that can't be deployed into winners.
As one longtime investing adage tells us, if you suffer a 50% loss on a stock, you need that stock to double in price (a gain of 100%) just to get back to even.
And let's be honest: How many times has one of your stocks doubled - after it took that kind of a beating?
There are many strategies you can use to protect yourself from big losses. Just last week, for instance, I showed you how to bolster your portfolio by investing in companies with strong growth prospects and a record of consistent dividend payouts.
I call those companies "Alpha Bulldogs" - and recommend the shares of the strongest performers to subscribers of my Permanent Wealth Investor advisory service.
In last week's report - "Investment Protection: These Dividend Stocks Yield Twice as Much as Treasuries" - I discussed two specific "Alpha Bulldog" stocks: B&G Foods Inc. (NYSE: BGS), and a second whose identity was withheld specifically for the charter subscribersof our newest premium advisory service - Money Morning Private Briefing.
But as I noted above, finding great investments is only half the battle. In the work that I do for my subscribers, I must also avoid big losers.
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Investment Strategies: Why Dividends, Inverse Funds, "Glocal" Stocks, Commodities and Emerging Economies Are the Places to Be
After a wild first quarter that included unrest in Egypt, Libya and Saudi Arabia, a spike in oil and gasoline prices, an apparent acceleration of inflation and continued global debt fears, investors need to embrace investment strategies and investment choices that will provide returns even as they manage risk, says Money Morning Chief Investment Strategist Keith Fitz-Gerald.
"In many ways, we are truly entering uncharted territory," Fitz-Gerald said.
In a wide-ranging interview with Executive Editor William Patalon III that represents the latest installment of Money Morning's "Quarterly Report" series for the 2011 second quarter, Fitz-Gerald talked about the first quarter and provided a detailed look at what he sees ahead. For instance, Fitz-Gerald said that:
- Despite the bull market in U.S. stocks, the U.S. economy and accompanying financial system isn't as strong as it looks, noting that "there are still massive cracks in the system."
- Investors should make sure to watch the U.S. Federal Reserve, since its decision to continue or to end its current monetary-policy strategies could determine where U.S. stock prices go from here.
- Prices will continue their general upward trajectory, which is why he ultimately sees oil at $150 a barrel, gold at $2,500 an ounce and silver crossing the $50-an-ounce threshold.
What follows is an edited transcript of the question-and-answer session that Patalon hosted with Fitz-Gerald.