This don't make sense. Tax cuts on dividend yielding stocks will make investors go out and buy dividend stocks, whose price will then rise, and the dividends will fall!?! Its a catch-22! As a matter of fact, with the current dividend yield on the Dow stocks, you would need Dow 5000 to see any significant gains whatsoever out of dividends. Which will never happen if investors go out and buy those stocks. Does this make any sense to anybody?

Can't they make up their minds? Do they want the market up or down?

 

Yeah it's kinda screwy. The only thing that is going to get people back into the market is to restore consumer confidence. People will then feel comfy about spending dough. The companies will be able to turn a profit. Stocks will rise in turn pushing up funds and the like. Now if there was only a way to get all those who lost their jobs, employed. Ease the fears of consumers that all the companies out there have great accountants, and that there will be no war. Then maybe we could get on the way back to Dow 15k. We shall see I guess.

 

You said it

Getting people to spend is the only way, and this is not possible at this time. Too much over-capacity. After 911, Bush said, "go spend", and we did, and the markets rallied. Then the money ran out, the markets plunged. Now what? No more trump cards to play. Just gotta ride it out and be prepared.

 

>This don't make sense. Tax cuts on dividend yielding stocks
>will make investors go out and buy dividend stocks, whose
>price will then rise, and the dividends will fall!?! Its a
>catch-22! As a matter of fact, with the current dividend
>yield on the Dow stocks, you would need Dow 5000 to see any
>significant gains whatsoever out of dividends. Which will
>never happen if investors go out and buy those stocks. Does
>this make any sense to anybody?
>

Well, you're not making sense to me. Perhaps I don't understand your point, but dividends paid on stocks bear no relation to the price of the stock. If you own Ford stock, for example, you get a quarterly dividend payment of $0.10 for each share that you own. If you own 1,000 shares, you get a check from Ford in the amount of $100 each quarter. It doesn't matter whether the stock is trading for $10 a share, or $20 a share, or $5 a share. The dividend is set by the Board of Directors on a per-share basis.

Right now, dividends are taxed as ordinary income. Thus, if you own 1,000 share of Ford, you get $400 in annual stock dividend payments from Ford that you have to pay taxes on. If you're in the 28% federal tax bracket, that means that you have to give Uncle Sam $112 of that dividend, and you keep only $288 of it.

An elimination of the tax on stock dividends would be very helpful to retirees, because they could more easily live off their savings. It would theoretically help the market by encouraging people to invest their savings in stocks instead of putting it in savings accounts and CDs, because interest on those things are subject to taxes.

It would also tend to favor some stocks over others, however, as many companies no longer pay dividends of any kind, and the dividend rate varies widely. GM, for example, pays an annual dividend of $2.00 per share -- 5 times what Ford pays. Microsoft, on the other hand, doesn't pay a dividend at all. The result in that dividend-bearing stocks can be expected to increase in value relative to those that pay little or no dividends. I guess it also means that more companies will decide to start paying dividends.

I don't see, however, how elimination of the tax on stock dividends would cause stock dividends to fall. That just doesn't follow.

 

Ford is currently paying a dividend yield of 3.97% and its priced $10.13 as of close on 1/7/03. Doing the math, $10.13 X .0397 = $0.40 rounded down. Look below the chart here and see I am right http://finance.yahoo.com/q?s=f&d=1y

As you can see, the income a shareholder receives from dividends is LARGELY dependent on the share price.

I am aware of the taxation on dividends and how to compute it. Yes, a lower tax would seem to be favorable to retirees on first glance. However, if everybody runs out and buys shares of the stock a retiree owns, that dividend yield will go down. And, anytime your paid lower, taxing it less doesn't seem to carry much weight. One good thing can be said though, if the retiree is smart enough to sell the stock at the higher price, they will come out ahead (assuming of course that the capital gains tax doesn't steal away the profits). And this selling, fueled by the more intelligent of the bunch, will drive the bear out of his hibernation. At that time, the share price will plunge and dividend yield will rise. The less prudent retiree will be left holding the bag, as the share price will likely be lower than he originally paid and earnings will be declining, forcing a eventual reduction in dividends by the board. So, not only will he own a less valuable stock, but he'll get the same or lower dividend yield as before. But he'll have the benefit of the lower tax rate, oh boy.

There is a nice article here http://www.dailyreckoning.com/home.cfm?loc=/body_index3.cfm&qs=id=4591&tp=a
He talks some about dividends there, I'll post a couple quotes here.

""Dividends are coming back in style," says John Shoven, economist at Stanford. Baby boomers, beginning their retirements, are going to need income. Despairing of selling stocks for big capital gains, they're going to look to the stock market for income.

But where will the income come from? S&P stocks are already paying out 53% of their earnings - up from 45% they paid in 1981, when you could get 6% dividend yield. In order to increase dividends just to 3%, they'd have to pay out every penny in earnings."

" There are only a couple of ways in which dividend yields could rise - either companies have to earn more money, or stock prices have to fall."

"Don't count on higher earnings. So far, during this 'recovery' stage, profits have been falling - an unprecedented experience. And there is not much reason to think they will get much better soon. Businesses have already cut expenses. Expense cuts produce quick increases in profit margins for an individual company. But one companies expense is another's income...so the net effect throughout the economy is negative. What produces profits is capital investment...of which there has been very little. Companies typically build new factories, hire new workers, and sell new products at a profit - that is what gives them earnings to distribute to their shareholders."

"Since earnings are not likely to increase, the only way dividends might go up would be for stock prices to do down. A 4% dividend yield would imply a Dow below 4,000."

 

AT the risk of sounding argumentative....
What then is a valid option that has no potential downside - or one you would deem "less undesireable"?
Thanks,
Brian A

 

>Ford is currently paying a dividend yield of 3.97% and its
>priced $10.13 as of close on 1/7/03.

That percentage will change daily with the price of the stock. The dividend is fixed by the board of directors at $0.10 per quarter, or $0.40 per share per year.

If the share price went up to $20 (I wish!) then the dividend yield would be 2%.

 

>AT the risk of sounding argumentative....
>What then is a valid option that has no potential downside -
>or one you would deem "less undesireable"?

Bush is just trying to get the retiree's votes, that's what I think. Since they are largely made up of "baby-boomers". On the surface, it looks like a good deal for retirees. It's interesting you said "less undesireable". Now you have me thinking. Somebody needs to come up with an awesome product that people just have to have and will go out and buy. That will spark new jobs to manufacture this awesome thing. Which will, in-turn, feed on itself and the economy will grow. New factories will sprout up, which will need other factories to supply tooling, raw materials, etc. But, the way it stands now, the market place is saturated with stuff people either already have, or will never own. Consequently, spending has decreased, people have lost jobs, factories closed, more people lost jobs, more factories close, blah, blah... The delimma is, what tax cut will break the chain? I have long thought that none could, and left it at that. Not really giving much mind to what might be "less undesireable". But if I had to call it, I would think giving to the people that like to spend the money. Retirees are typically not very big spenders, atleast, not the ones I know. I would think people starting families would be the largest. Any tax cuts that affect them, should give them more buying power. That will create demand for production, which will drive employment, then capital and asset investment, and so on. Giving tax cuts to retirees seems to be a bandage, covering the symptoms and not the cause, more or less. Although, you'll get more votes by applying this bandage.

Now a note about trickle down economics. This was proclaimed a success by many after the boom in the 80's and 90's. But, I'm not so sure this was the driving force behind it. I say, computers drove that market. In the 80's we started getting computers in our cars, at the grocery store, and the defense dept was buying them hand over fist. Of course, we all remember what happened in the 90's, right? Well, now what? Computers rule the world, everybody has one, so now what? Well, the idea of pumping money into corporations to buy machines to make more computers so nobody will buy them is absolutely absurd! Maybe this would work in the 80's or 90's market, but today, its the consumers that are holding up the show, not the industry. They have all the machines to meet the demand that they saw coming from "well-trained" economists that could "see the future" in 1999. So now they have warehouses full of crap nobody will buy. How will it end? The corps will liquidate to whoever will buy at rock bottom prices and people will lose jobs and factories will close and so on. Until it hits bottom or somebody thinks of something really cool real fast. No tax cut is going to stop it.

 

>If the share price went up to $20 (I wish!) then the
>dividend yield would be 2%.

Yeah, that's what I have been trying to say. If the price goes up, the dividend yield goes down. So causing rampant speculation in dividend yielding stocks will drive the yield down.

 

I can see your point RanDawg, but.....

Has anyone else(as in someone who matters, ie. lawmakers) come up with something better?

Please don't say the Democratic party. Republicans may be "trickle down" but at least it's not "Robin Hood"- STEAL(excuse me, "penalize") from the rich and GIVE(excuse me, "Subsidize") to the poor (and lazy, and "victims", and funding for you-pick-the-special-interest-of-the-PC-crowd-this-week types, etc, & etc.)

I am not picking a fight with you. It's just that your posts have a decidedly Democrat-liberal flavor to them is all.

I voted for President Bush. I know he's no god, perfect, blah, blah, blah, but IMHO he IS the best available. And 100% BETTER than what we had.

You do make good points, though.

Now, do you have any upbeat posts? LOL < HUMOR HERE -NOT A SLAM>

Chuck

 

[updated:LAST EDITED ON 07-Jan-03 AT 09:14&nbsp;PM (EST)]>>If the share price went up to $20 (I wish!) then the
>>dividend yield would be 2%.
>
>Yeah, that's what I have been trying to say. If the price
>goes up, the dividend yield goes down. So causing rampant
>speculation in dividend yielding stocks will drive the yield
>down.

The yield may go down percentage wise, but that actual dollar amount per share stays the same as set at ten cents per share by the board of directors. I would be ecstatic if my yield in terms of percentage went down because that means that not only am I STILL getting ten cents per share per quarter in a check from Ford, but now my stock is also worth more per share, and if I choose to I can sell it for more than I paid for it or I can keep it and still get the ten cents per share as a dividend check. It's up to me.

 

During the Clinton years, while the Justice Dept. was trying to sue the gun manufaturers out of business. I bought some shares of Sturm Ruger for around $8.00 per share, at the time they were making money and paying a dividend of 80 cents per year. Now my simple brain said that is 10% per annum! That they will pay me just for owning the stock!
The retired person who has there money in CD's or money markets cannot approach that kind of a yield. I think that eliminating the taxes on dividends is a grand idea, that might get people to invest in stocks of companies that actually earn money, and produce things.

Perhaps this would hurt the speculative stocks, like dot. coms and such. But is that such a bad thing? Most speculative stocks have gone south in the last 2 years.

I wonder what my neighbor Warren Buffet thinks of eliminating the tax on dividends? I honestly don't know, because he has a liberal bent to him.

Greg58

 

>Has anyone else(as in someone who matters, ie. lawmakers)
>come up with something better?

Not sure

>Please don't say the Democratic party. Republicans may be
>"trickle down" but at least it's not "Robin Hood"-
>STEAL(excuse me, "penalize") from the rich and GIVE(excuse
>me, "Subsidize") to the poor (and lazy, and "victims", and
>funding for
>you-pick-the-special-interest-of-the-PC-crowd-this-week
>types, etc, & etc.)

Well, I agree, the robinhood scheme is a crock. However, that is the system we have and it will take forever to change it, if ever. To address the current situation and fix the economy NOW, we have to get consumers out there consuming. I'm taking as many wild stabs at this as the next guy, speculation is all we can really do. I'm just suggesting we stop taking so much from the guy who does the most spending, whomever he may be. Furthermore, we've only had one go at "trickle-down" and it was during at great bull-run in the market. I hardly think this is an endorsement for success. I could go on and on about how times are different with respect to "trickle-down", if you'd like.

>I am not picking a fight with you. It's just that your posts
>have a decidedly Democrat-liberal flavor to them is all.

I'm not a democrat. I may have voted for Bush, but there were only 2 guys running that had a chance of getting elected and I didn't want Gore. Doesn't mean I agree with Republicans either. I don't think "flavor" should matter, just facts, truth and reason. Oh, sometimes I side with the underDawg, just to bring balance to an arguement, doesn't mean I subscribe to the thought. With congress and the pres. both being repubs, I think we need balance.

>You do make good points, though.

Thank you

>Now, do you have any upbeat posts? LOL < HUMOR HERE -NOT A
>SLAM>

Well, I could post some meaningless fictious humor, lol. Just don't want my FTE buds getting the short end of any stick. Further, I find FTE has a "real world" attitude that greater represents the American society, which I find good for my own thinking.

 

How someone thinks getting less return on their money is a good thing is beyond me. It just goes to show how well politics work. If I invest X dollars and get 4% return, then the return drops to 2%, I would sell and find a higher rate of return somewhere else. But I guess that's just me.

*Side note: It is well known on wallstreet, especially in bear markets, for companies to issue dividends as incentive for investors to (please) buy their stock. (As the stock price is an image of the company's success). This acts as a "hedge" sort of. When the price falls, you still get some return and your less likely to sell the stock. On the flip side, when the price rises, your also less likely to sell the stock because the price is rising. It's all pschological.
BTW. Most people end up buying high and selling low, or else the rest of us couldn't make money. Speculation and panic. Greed and fear. These are the omnipotent rules that govern markets.

 

>During the Clinton years, while the Justice Dept. was trying
>to sue the gun manufaturers out of business. I bought some
>shares of Sturm Ruger for around $8.00 per share,

Well, I hope you sold it last year. That stock was just above 9 last week. I'm sorry to report, that's hardly a decent return over ten years. As of now, the dividend return is at 7.83%, and was lower last year. Factor in inflation and you'd have a comparible yield to a late 80's bank savings account.

>eliminating the taxes on dividends is a grand idea, that
>might get people to invest in stocks of companies that
>actually earn money, and produce things.

Lets me clear things up about equities. When a company goes public, they call upon an underwriter, who then issues shares and pays the company money for the shares. The company leaves the picture with the money. The underwriter then sells the shares to the public to regain the money they gave the company (if the underwrtiter can't sell them, they are stuck). Once all the shares are sold, any further trading stays amoung investors. (Of course, the underwriter takes a fee and other bankers may be involved on the ground floor). So, when you buy stock, you are not supporting a company. The company already has all the money they are going to get from the stock. You cannot buy stock unless someone is willing to sell to you and you cannot sell stock unless someone is willing to buy it. This is how the price fluctuates.

Now bring dividends into the picture. They are paid out of earnings, which will decrease the earnings; hence, decrease the stock value. There is a lot to consider in making a decision to buy dividend stock.

http://invest-faq.com/articles/stock-ipo.html
http://invest-faq.com/articles/stock-a-basics.html
http://invest-faq.com/articles/stock-dividends.html

>Perhaps this would hurt the speculative stocks, like dot.
>coms and such. But is that such a bad thing? Most
>speculative stocks have gone south in the last 2 years.

Anytime there is speculation, it is a bad thing. That's how bubbles form.

>I wonder what my neighbor Warren Buffet thinks of
>eliminating the tax on dividends? I honestly don't know,
>because he has a liberal bent to him.

Makes one wonder. Berkshire Hathaway hasn't paid a dividend in upwards of 40yrs and claims never to do so. If that tells you anything.