Dividend stock problems

When a strategy is over-used, it would create a mild bubble waiting to burst. There is no exception except one or two with unusual circumstances (like the current gold rush that is due to our money printers at the max.). When the shoe shine boy told a investor he was buying stocks, a famous Wall Street investor (forgot his name) unloaded everything as he knew the boy did not do any research and it was the herd mentality.

When Sarah Cohen (could be another skater) told the TV reporter she was into dividend stocks, she seems to be the shoe shine boy except she is prettier and she has a lot of skills except in investing.

When all the money flows from other funds to funds and ETFs specialized in dividend stocks, it is a mild bubble. History tells us the average retail investor always selects the wrong side of the market. Fidelity's money fund flow always is a good contra indicator for the market.

Past performance does not guarantee future performance unless market conditions are the same which seldom happens. Examples abound from 2000's internet boom to bust. It is still a mild bubble as the market in general is fairly valued today. Dividend stocks perform better than the market but not by a large amount when we take out survival bias. When we exclude the financial companies like Lehman Brothers, AIG, Bear Stern..., the dividend stocks perform better than reality.

There were several articles (at least two from WSJ) on how the dividend stocks are over-valued. The premium on dividend stocks has been the highest in last 30 years compared to stocks without dividend on same fundamentals in theory.

The straw that breaks the camel's back could be Obama's proposal of taxing dividends as regular income plus several percentage for Medicare. When the law is passed, I'll lead the herd to dump the dividend stocks.

The other straw could be the general market is heading to a big plunge.

The arguments against mine are 1. We used to pay more dividend tax before today's low tax rate, and 2. It has to compare with capital tax rate.

When 10% of population controls 50% of this country's wealth, the rich will most likely replace dividend stocks with other investment for total return (= appreciation + dividend + covered call (for some) - taxes - inflation). They would have to pay about 42% tax for dividends plus some for state/local taxes.

You can argue that all your dividends are in tax-free retirement accounts and/or my tax rate is not that high. However, most likely you and I do not belong to this group who drives the market but they are.

You do not have to realize the gains on capital gain. When you die, the cost basis will be stepped up. In a word, you have more control with capital gains but not with dividends. The capital gain will be proposed to be 20% (vs about 42% max. for dividends).

You may argue your dividends are not taxed as they're in retirement accounts. However, when you distribute the retirement accounts, they're treated as regular income. Most likely your tax bracket will be lowered when you retire. It does not apply to those who are successful in investment in their retirement accounts.

There is a good chance Obama will be re-elected but the Congress will be controlled by Republicans. If so, the tax laws may not be passed that easily esp. in the proposed form. Once he is re-elected, raising taxes could be just another election promise to be broken and he will blame the Congress for not passing it.

The current low tax laws will be expired by the end of this year unless there is rescue or postpone. Vote Republicans for better tax treatment on in investment though I do not belong to any party.

There are other 75 articles in my book that could be the best investment in your life.
http://ebtonypow.blogspot.com/

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(c) TonyP4 2012. Written in 4/4/12. Last updated in 4/29/12.

Disclaimer:

Do not gamble your money you cannot afford to lose. Past performance is a guideline and does not guarantee future performance.

All my posts are for informational purposes only. I'm not a professional investment counselor. Seek one before you make any investment decision.