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If you think about it Romney already gave me his personal answer on his 2010 return. By not declaring all of his charitable deductions he accelerated his income into 2010. Now I believe he has his charitable deduction carry forward that will be more valuable in future years. Otherwise why not take all the deductions that you are entitled to? It is my opinion that Romney thinks taxes are going to rise by his personal actions. It might be wise to follow his example.
[QUOTE=Tiny12;427286]Big Boss Man, I think Obama will win, and the composition of the House and Senate will be about like they are now. If Romney wins and can get his agenda (including cost cuts) through, you shouldn't see your taxes go up a lot, unless your income is high and you take extensive advantage of loopholes. Yes, if you're a hedge fund manager whose performance fees are taxed at 15% or an oil operator who gets percentage depletion, you've got a problem. Otherwise I wouldn't worry. Irregardless, the one move you could make if Romney wins is to try to move Schedule A deductions into 2012, in case he puts a cap, $17,000 or $25,000 or whatever, on deductions. Charitable deductions come to mind as something where you'd have control over timing. Actually Obama provided indications he'd like to limit charitable contributions . I think Obama would be likely to limit deductions on Schedule A too.[/QUOTE]For Californians making a decent income a 17k or 25K limit on Schedule A deductions is a major problem. You probably hit that with just State income and property tax.
Probably if you are low to mid six figure income you are in the danger zone of seeing raised taxes under either administration. However if they can really get the deficit down I think my investments will do better than what PIMCO, for example, is calling the "New Normal."
I like your posts Tiny12. You have a sober way at looking at all sides of a position.
[QUOTE=Big Boss Man;427277]I am frustrated this morning because I read three different articles that Obama mischaracterizes Romney's proposed tax policy. If Romney would just lay out the plan then I would know what I have to do to lower my tax bite. One line of Obama's from the debate that resonated with me was something like that Romney's tax plan is so good that they cannot tell the middle class about it. Most likely scenario in my mind is that Romney reduces mortgage interest deduction and begins to tax my medical benefit as well as increasing the social security tax (or simply return to 6. 8% rate).100 percent certain Obama raises my taxes. Usually I try to defer all income. This year I think will recognize income before I have too. Pay more taxes than I have to but accelerate purchases of a new car and maybe do some home remodeling. Anybody have keener sense of this thing than I do?[/QUOTE]How do you know that Obama has mischaracterized Romney's tax plan, given Romney's refusal to actually mention most of the specific deductions he'd remove? Obama didn't make up those claims about Romney's probable tax plans, they came from a non-partisan (admittedly, this is debatable) analysis that tried to make the numbers work, and they extrapolated the most plausible set of assumptions that actually yielded the results that Romney was claiming.
Accelerating recognition of capital gains has some appeal, as does moving away from dividend paying stocks towards lower payouts. I have a plan for what I'm going to do if the black guy gets in and another one for if the white guy gets in, and another one if the white guy gets in with enough of a majority to really do anything. Itemizers may want to accelerate medical expenses as the 7. 5% threshold is moving to 10. Also, for moderate income folks, note that the means testing in the health care law makes Roth IRAs relatively more advantageous to be holding going forward, but at the same time putting the annual contribution in the standard IRA will give a bigger health care subsidies.
Thanks for the kind words Big Boss Man.
Despite the potential increase in taxes, I still think dividend growth stocks are a good neighborhood. There is a whole cult of dividend growth investors at Seekingalpha. Com. They shout everyone down who offers a counter opinion. I am not that radical. I use the ETFs VIG and SCHD as a holding place until I get a specific stock idea. Merrill Lynch runs a quality dividend portfolio and it does well or at least holds up in recessionary environments.
It is time to think about these things. You guys are an unexpected pleasure to read on the same site with all the name calling and the pimp / tout melodrama.
THank you,
Bob
[QUOTE=Big Boss Man;427301]Despite the potential increase in taxes, I still think dividend growth stocks are a good neighborhood. There is a whole cult of dividend growth investors at Seekingalpha. Com. They shout everyone down who offers a counter opinion. I am not that radical. I use the ETFs VIG and SCHD as a holding place until I get a specific stock idea. Merrill Lynch runs a quality dividend portfolio and it does well or at least holds up in recessionary environments.[/QUOTE]I would also be wanting such dividend paying stocks as I did choose to hold to be in tax deferred accounts even more so than I wanted them to be there before. Right now the risk-free rate is so low I am not sure the Gordon model would behave normally. You could say the same for beta, for that matter, although I don't believe in beta (capital asset pricing model). Risk-free T-bills and gold are starting to look like Giffen goods.
There's a good chance the maximum tax on dividends won't actually go to 43.4%, as it's supposed to on January 1 under current law. Senate Democrats voted for a 23.8% rate earlier this year. A 43.4% federal tax on dividends on top of a 35% federal tax rate on corporate income would be bad for a host of reasons, so hopefully reason will prevail.
I'm a big believer in dividends too, so much so that I'm one of the few around that actually still uses something like Dickhead's Gordon model, where you estimate the present value of future dividends to be paid by a company. There are a couple of studies out that show historically stocks that pay better dividends also appreciate in share price more, which is the opposite of what you'd expect. They weeded out companies like utilities and MLP's that distribute most of their income in dividends though -- they're a special case.
Really big dividend advocates should read Modigliani and Miller on the irrelevance of dividends. The double taxation is a good point but the only ultimate solution to that is to dispense with the fiction of a 'corporate' income tax, given that corporations cannot be taxed, only individuals. But what I get out of Modigliani and Miller is this: They conclude that absent taxes and transaction costs, dividend policy is irrelevant to stockholder wealth. Now obviously there are transaction costs (although they have gone way, way down since M & M) and taxes. So, when the capital gains rate and the ordinary income rate are the same, I have no planning opportunity. When they are not, I may behave differently. But I am not trying to speculate what will happen to the tax laws. I am just trying to consider all the possibilities so that I can adjust quickly and appropriately once the rates solidify. I'm in a pretty good tax position so I'm more concerned with how the ultimate policy will effect the overall economy. Capital gains are going to affect me more than ordinary rates going forward and I would say Obama will be more prone to raise capital gains rates (or better said, let them go back to where they were before he ever was heard of) while keeping the ordinary rates in the lower two brackets, or maybe even three brackets. What Romney would be more prone to do is unknown, of course, given the top-secret nature of his tax plan.
I'm convinced, and believe there are some studies to back me up, that companies that pay good dividends AND have good cash flow on average produce superior returns to shareholders. That's not phrased very well, but by "good cash flow", what I mean is they're not borrowing money or issuing shares to be able to pay dividends, and they're not paying one-off dividends.
Yes, a company that can produce good return on invested capital (ROIC) and that has good opportunities for growth should reinvest most of its free cash flow in the business, instead of distributing dividends. But what if ROIC is mediocre? The shareholders are going to be better off if earnings are distributed in dividends, which they can re-invest in better opportunities, instead of being used for boondoggles and management's empire-building. So payment of dividends can be an indication that management has best interests of the shareholders in mind.
You could argue that a stock that will never pay a dividend is nothing more than a piece of paper. What separates an investment in stocks from an investment in something like gold is that the stock produces an income stream. I'll admit though that saying a stock is a piece of a business and should be valued as such is a better argument. But not if in the end some company that never paid a dividend ends up with either lots of cash that it will never distribute to shareholders or a much larger business that's no longer profitable.
Studies are mixed and the effects aren't robust across long time frames. I believe in the maturation theory of dividends, which is not inconsistent with your "pay divs if ROIC is mediocre" scenario. A new firm faces a high cost of capital and frequently has a high debt ratio. So it makes sense not to return scarce cash to shareholders. Once profitability has been established, leverage is reduced, and credit has been established, it might makes sense to start paying a dividend. Or, per M & M, it might not matter, or, per me, depending on the tax laws it might or might not be good, and should be compared with the effects of a buyback. One point of view I have heard is that it then becomes a niche market where some investors want current cash flow and some don't, so firms develop a variety of dividend payout policies to cater to the niches. I'd say that while paying a dividend might indicate they have the best interests of the shareholders in mind, if doing a stock repurchase turns the shareholders' ordinary income into capital gains, that needs to be done instead. Of course that raises your ROE cosmetically as well, in case anyone is dumb enough to fall for that.
One thing that is for sure true is that periodic cash payments are going to reduce the volatility of the stock, [I]ceteris paribus[/I]. That implies a higher compound return if the cash payments are reinvested, for any given set of mean returns (Modern Portfolio Theory). But, for many investors, they want the periodic cash payment as income and not to reinvest. So, I doubt that effect would be as robust in practice. The flip side of this is that any increase in the compound return could be more than offset by the acceleration of the tax effect. It's relatively easy to analyze the total return to the shareholder: the capital appreciation during the period plus any cash payment received (I. E, dividend). However, and importantly, it's virtually impossible the overall returns to a firm's entire collection of shareholders, because they all have different effective tax brackets. That is a real problem with studies that say things like "growth outperformed value" or "high payout stocks outperformed low payout stocks," among other comparisons. The studies normally assume some kind of average taxpayer or average tax rate, often without much justification for the rate chosen.
Another issue is reversion to the mean. A bunch of studies come out saying that, for example, high dividend yield stocks outperformed low dividend yield stocks over X period. So then everybody runs out and buys high yield stocks, driving up their price and thus driving down their yield. The Dogs of the Dow is a good example of this phenomenon.
Thanks for your posts Dickhead. You've changed my way of thinking a bit, and the way I screen stocks, if I can figure out a way to quantitatively screen buybacks. I hadn't thought through the tax considerations the way you have.
[QUOTE=Tiny12;427310]Thanks for your posts Dickhead. You've changed my way of thinking a bit, and the way I screen stocks, if I can figure out a way to quantitatively screen buybacks. I hadn't thought through the tax considerations the way you have.[/QUOTE]I believe a study was done on buybacks and the majority of buyback stock was been used to provide employees with shares. Ergo, the end result over time was there was no real reduction in shares. It was 5-10 years ago that I read this study and it may not be valid in the current market environment.
[QUOTE=Dickhead;427294]Accelerating recognition of capital gains has some appeal, as does moving away from dividend paying stocks towards lower payouts. I have a plan for what I'm going to do if the black guy gets in and another one for if the white guy gets in, and another one if the white guy gets in with enough of a majority to really do anything. Itemizers may want to accelerate medical expenses as the 7. 5% threshold is moving to 10. Also, for moderate income folks, note that the means testing in the health care law makes Roth IRAs relatively more advantageous to be holding going forward, but at the same time putting the annual contribution in the standard IRA will give a bigger health care subsidies.[/QUOTE]Dickhead, I am curious as to your investment scenarios depending upon the election outcome. I see USD confidence crumbling faster under Obama than Romney, but I don't see that either can change the USD endgame.