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Author: HelicalZz Big gold star, 5000 posts Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8836  
Subject: Re: Tax implications Dividend Growth Investing Date: 7/18/2006 4:34 PM
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Coming back to my original question, is there any major advantage to opt for a dividend stock (in a taxable account) over a non-dividend paying stock?

I believe, but could not prove to you, that there is an advantage over the long term. It is not a major or obvious advantage. Prudent selection of what companies you hold is far far more important than what type of companies.

So Helical, are you suggesting that if the Dividend paying stocks are held in a taxable account at least 15 % of your earnings via dividend will be taxed? If true then what is the real advantage of such stocks.

Yes, you pay 15% tax on qualified dividends (could be lower if you are low income)see : http://www.fool.com/taxes/2003/taxes030620.htm .

You would also pay 15% tax on long term capital gains on non-dividend paying stocks (as well as on the capital appreciation on dividend paying stocks) when you realize gains. The tax is essentially the same, but the control of the timing is not.

So the issue comes down to are dividend paying securities superior over the long run than non-payers. Jeremy Siegel would argue that they are and I'm inclined to agree. They are the best chance you have for getting rich slowly in my opinion. But allocation strategies, goals, and time frames are personal things. I think there is a role for some 'shoot for the moon' securities as well.

One bit of irony is that near or in retirement, I would rather have dividend paying securities in my taxable account than IRA. This is because IRA distributions are taxed as income which may well be (hopefully) higher than the qualified dividend tax rate. So collecting dividends in an IRA as disbursing the cash could be a bad tax strategy. Up until retirement / disbursement time, I prefer dividend payers in an IRA as well. They make up my largest allocation anyway.

Zz ∞

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