Go to Jeff Salisbury LWGate Home Page.From: "Lester M. Levy MD" <llevy@hoflink.com>
Subject: Re: Anyone pay attention to dividends or P/E ratios?
Date: Mon, 20 Dec 1999 00:00:00 -0500
Next Article (by Date): Re: "Hiding" capital gains "L. Chen"
Previous Article (by Date): Estate Taxes "Harold R. Justice"
Articles sorted by: [Date]
[Author]
[Subject]
Subject: Dividends and P/E Ratios
IRA:
After having looked at various entities for many years, I have concluded
that much of the conventional wisdom offered to the average Joe is often
worthless. Often a conservative portfolio is represented as consisting
of a mixture of bonds, income producing stocks and some fraction of
growth stocks, the percentage declining with increasing age, and lack of
sophistication.
The first thing to note is that in recent decades, bonds and stocks have
tended to move up and down together (not opposite) and often in response
to interest rates. With rising interest rates, you can lose as much
money with a bond as with a stock, but the historic rate of return of
stocks has been 8-9 percent, while bonds have yielded perhaps 4-5
percent. An income producing stock (read high dividends) pays out about
the same as bonds, and with a large amount of its earnings paid out
tends not to grow in value as much as a stock which pays little or
nothing in dividends. Dividends and bond income (except tax-exempt
income) are almost always ordinary income, and it is not difficult to
reach a marginal tax rate in the 30's percent, even for an average guy
or gal.
With a 31 % tax rate, a 5 percent yield leaves only 3.5 percent, which
barely (if at all) compensates for the loss of principle due to
inflation. On the other hand, investing in growth stocks (or the S&P
index) with little or no dividends, can easily produce needed income by
selling off those shares which have been held for more than a year, and
hence will be taxed at a maximum of 20 percent. Thus 8 percent yield
after 20% tax leaves 6.4 percent well above the average inflation rate.
Thus investing in bonds or income stocks will often not produce useful
income... can that be considered safe?
- --
-Lester M. Levy, MD llevy@hoflink.com
- -
Next Article (by Date): Re: "Hiding" capital gains "L. Chen"
Previous Article (by Date): Estate Taxes "Harold R. Justice"
Articles sorted by: [Date]
[Author]
[Subject]