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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 211768  
Subject: Compounding Machines vs. Dividend Cash Cows Date: 10/16/2012 4:16 PM
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The market has been rewarding companies that pay large dividends this year which is likely a consequence of desperate investors attempting to escape the current zero percent yield environment. To a certain degree, this is logical and if faced with the choice of owning the ten year treasury or something like Johnson & Johnson, I would pick the latter in a minute not only due to the higher current yield but also because the principal is likely to be better protected from inflation.

My somewhat speculative view is that this enthusiasm is more likely than not going to reverse sharply in 2013 as the top dividend tax rises to 43.4% from 15% catching many investors off guard and severely cutting their after-tax income. Yes, this view is still predicated on an Obama victory and while the margin is much narrower than before, the fact remains that all Obama has to do in order to win is hold Ohio and a couple of smaller swing states. Romney has a higher bar to clear, although the odds on Intrade now suggest he has a 40% odds of winning.

IF Obama wins and the dividend rate increases so dramatically, my view is that companies like Berkshire are going to be in very high demand. How many companies can reliably compound capital at around 10% per year without taking significant business risk? Markel would also fall into the same category as would Loews (which only pays a low dividend).

I don't pursue mechanical or quantitative strategies like many others here so I thought I would pose a question: Would it make sense to screen for companies that have the ability to internally compound at high rates and to consider a basket long position in the most attractively valued of this group? This could perhaps be a good strategy in most market environments but I think it could be especially promising going into 2013 ... the catalyst could be a Barron's cover story extolling the benefits of internally compounding wealth within a company that pays small (if any) dividends, thereby allowing shareholders to pick the time of their choosing to realize capital gains taxed at less than half the dividend rate.
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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194893 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/16/2012 6:25 PM
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Hopefully Obama will make a huge mistake and bring up Romney's 47 % comment tonight. IF Romney has any smart people around him, Romney will use that to bury team Obama on the misspeaking issue and break into a 4-5 point lead after the debate, stay tuned this could be a big market mover if Obama falls into the trap.

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Author: Technodweeb Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194899 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/16/2012 10:09 PM
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I agree wholeheartedly!

The problem is you must make the correct list of companies growing internally, and also pay NO dividend or close to nothing. That cuts the list of great companies down bigtime!

Here is the fist name at the top of our list:

1. Berkshire Hathaway

Maybe Leucadia? My wife just bought some of it recently.

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194901 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 10:19 AM
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Would it make sense to screen for companies that have the ability to internally compound at high rates and … … … 

Your post is a pathological attempt to cover for WEB's refusal to pay dividends. It is in line with Susan Rice covering for Obama. No, thank you. There are plenty of companies that compound nicely AND pay their shareholders.

G H U

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194903 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 10:33 AM
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Your post is a pathological attempt to cover for WEB's refusal to pay dividends. It is in line with Susan Rice covering for Obama.

Nice one ...

Call me crazy, but I would rather have Berkshire compound intrinsic value internally over the next decade at 10% +- than have much of its free cash flow distributed to me and taxed. Berkshire's intrinsic value will rise at an irregular but steady pace reflecting reinvested retained earnings and I can liquidate shares at a time of my choosing based on my assessment of the valuation of the shares and my tax situation.

Berkshire's dividend policy should be based on reinvestment opportunities or lack thereof, not based on the liquidity needs of individual shareholders who should be expected to manage their affairs in a manner that does not require liquidation of shares at inopportune times. This is easy enough to accomplish by not having funds needed over the next several years invested in stocks.

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194905 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 10:50 AM
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and I can liquidate shares at a time of my choosing … … … 

unless death catches you first in which case your efforts, intellectual and fiscal, are worth the dividends you didn't get.

G H U

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194906 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 11:05 AM
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unless death catches you first in which case your efforts, intellectual and fiscal, are worth the dividends you didn't get.


Again, that's a matter of individual planning. I don't think Berkshire can set its dividend policy based on such factors.

Any one of us can face unexpected death on any given day, not just the elderly. If this occurs, the value of Berkshire's shares will be reflected in a shareholders estate and most people would presumably like to maximize the value of the estate for benefit of individuals or charities. Given the capital gains step-up in basis at death, compounding internally within Berkshire would logically maximize the value of an estate if passed on to individuals.

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Author: Arill Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194913 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 4:47 PM
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I've posted that I think Uncle Warren let us down on the buyback.
However, I'm totally with him when it comes to not paying dividends.
Tax ramifications would be horrendous for many.

Given Berkshire's history of thinking out of the box, I've wondered if when the time comes when they want to make distributions it could be done differently than most companies.

Perhaps another class of stock. Although, I don't know how you could keep the ratio's between shares consistent if only one class is paying dividends.

Any thoughts?

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Author: Technodweeb Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194916 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 5:03 PM
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With the new dividend laws taking effect if Obama wins I place the odds of getting them along the lines of close to zero. Imagine being taxed on dividends at the highest possible rate which I believe is going to be around 43%. It goes way against Buffett's long term compounding strategy, which he believes that very long term shareholders should be able to benefit from instead of just giving it away forcefully through taxes.

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Author: Technodweeb Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194917 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 5:05 PM
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And as for each class of share getting different dividend I also place that at close to zero. The outcome would be total chaos amongst all shareholders.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194918 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 5:21 PM
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With the new dividend laws taking effect if Obama wins I place the odds of getting them along the lines of close to zero. Imagine being taxed on dividends at the highest possible rate which I believe is going to be around 43%.

43.4% for those in the top bracket. Well over 50% effective rate for those in high tax states. At the same time, the capital gains tax will be 23.8%, up from 15%. Under such a regime, companies that have no reinvestment opportunities and have to pay out cash should logically trade at lower valuations than those capable of internal compounding. Of course, this goes against the current trend of seeking out high dividend stocks so there could be a sharp market reaction.

The electoral college math continues to favor Obama with far more paths to victory. To the extent investors allow the election to influence their strategy at all (probably a bad idea), it is best to bet on the most likely outcome rather than the outcome one would prefer.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194919 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 5:26 PM
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Perhaps another class of stock. Although, I don't know how you could keep the ratio's between shares consistent if only one class is paying dividends.

This is probably not feasible without making adjustments to classes of stock not entitled to dividends that increase ownership of the company vs. classes that do pay dividends.

It is generally bad to alter the rights of different share classes after the ground rules are set. Many A shareholders were not pleased when the charitable contribution program, one of the differentiating factors for the As, was eliminated several years ago even though this represented a trivial component of value for the As.

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194920 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 7:08 PM
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Many A shareholders were not pleased when the charitable contribution program etc. etc.

They were displeased. not because they lost a mark of rank over those uppity B shareholders, but because their favorite charities lost a source of income. The ostensible reason was that salespeople of the newly acquired pampered chef were complaining that planned parenthood, which also figured in last night's debate as a bone of contention, was supported by Mr. Buffett out of his own allotment of dollars as a shareholder. I recall distinctly that BRK. fully aware how mean=spirited this move would appear when published, posted the announcement on a Sunday morning so it would attract less notice.

G H U

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194921 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 7:49 PM
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The ostensible reason was that salespeople of the newly acquired pampered chef were complaining that planned parenthood, which also figured in last night's debate as a bone of contention, was supported by Mr. Buffett out of his own allotment of dollars as a shareholder.

Actually it was because of a boycott of Pampered Chef by pro life groups that didn't understand that Berkshire's giving to Planned Parenthood was a result of individual shareholder directions rather than policy decided on by Buffett himself.

This type of side effect is why I was concerned that the "Buffett Rule", as portrayed ny many commentators on the right, could harm Berkshire's business interests. I'm glad that my concern turned out to be without merit.

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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194922 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/17/2012 7:52 PM
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<< Perhaps another class of stock.>>


its a transfer agent nightmare having 3 classes of common stock. Its bad enough to have common and two classes of wts, A and B, been there done that. There is no chance, zero, that buffett or munger would pay a div into a 40 % tax rate, less than zero, period. IF obama wins and gets the tax rate on divs increased to 40 % plus tax REV will drop not rise, net net. Companies will buyback stock and reduce divs if they have any brains.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194932 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 8:56 AM
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The market has been rewarding companies that pay large dividends this
year which is likely a consequence of desperate investors attempting to
escape the current zero percent yield environment.
...
My somewhat speculative view is that this enthusiasm is more likely
than not going to reverse sharply in 2013 as the top dividend tax rises
to 43.4% from 15% catching many investors off guard and severely
cutting their after-tax income.


I think you're right about the trend, and I think you're right that many
investors may get caught off guard if the tax rate change, but
I don't think it will affect the current fashion for dividends or
the uptrend in the pricing of those firms.
I think dividend payers will be all the rage for quite a while yet either way.

First, though value/dividend firms have done well lately, it is still
far from unwinding the amazing underperformance they had 1.5-3.5 years ago,
let alone moving to a level of good performance compared to history.
If you compare a portfolio of no-dividend medium-to-large-cap stocks
to a portfolio of medium-to-large-cap stocks with the top 25% by
dividend yield, they tracked one another closely with various zigs
and zags from 2002 through 2009. Starting from the average ratio
in that era, top 25% dividend payers underperformed by a whopping 21.9% in
the roughly two years to Feb 2011. The outperformance since then
hasn't even brought a dividend portfolio up to where the no-div crowd is,
having made up only ~70% of the underperformance stretch so far.
The real stretch of dividend outperformance was the tech bear, March
2000 through October 2002. No-div returned -47%, top 25% div payers returned +35%.
Phrased more simply, for any time frame starting 3-10 years ago the good
dividend payers are underperformers, not outperformers, let alone bubbly.
This is despite the fact that the top 25% by dividend payout has outperformed
the no-div crowed over the long term, about .9%/year pretax in the last 27 years.
They still have a lot of catching up to do if they want to keep up that trend!
Maybe another 9% of outperformance?

Plus, what's the choice? If you need income, you're better off with a
dividend and heavy tax on it than on anything else available so it's Hobson's choice.
You can't simply switch to having a longer investment horizon; if you
need some money to spend in the next few years switching to no-yield
stocks is not going to satisfy that need—it's a different investing population.
Financial repression is not so easily dodged.

Jim

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194933 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 9:05 AM
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Plus, what's the choice? If you need income, you're better off with a
dividend and heavy tax on it than on anything else available so it's Hobson's choice.


I think an intelligent choice could involve building a five year laddered portfolio of treasury notes (or better yet, I Bonds for at least part of the portfolio). In a "normal" year, identify one or more investments approaching fair value to liquidate in order to fund a new five year bond purchase realizing capital gains in the process and paying tax at a low rate. In a "good" year, one could extend this out to six or seven years if many securities are trading above intrinsic value and the market is generally overvalued with few good opportunities. In a "poor" year when investments are trading way below intrinsic value and one wishes to avoid any sales, do nothing and let the laddered portfolio shrink from five to four (or three) years. Then, in better times, make up for this by replenishing the laddered bond portfolio.

Over time, I think this approach could prove to be more attractive than funding yearly income through higher taxed dividends. In the current environment with capital gains and dividends taxed at the same rate, I think it does make sense to fund at least part of income needs via blue chip type stocks paying generous yields but I don't think this holds up if dividends begin to be taxed at nearly twice the rate of capital gains.

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194935 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 9:50 AM
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In a "normal" year, identify one or more investments approaching fair value to liquidate in order to fund a new five year bond purchase realizing capital gains in the process and paying tax at a low rate. In a "good" year, one could extend this out to six or seven years if many securities are trading above intrinsic value and the market is generally overvalued with few good opportunities.

This might be a good strategy, but for most individual investors is hopelessly complicated and time consuming. Those who bother at all are likely going to plunk down their portfolio in a basket of decent dividend payers, take the income and the tax bite, and call it a day.

BTW, since we're talking about rates returning to where they were just over a decade ago, were people avoiding dividends at the time because of the "high" taxes, or were they just piling into Internet stocks because of all the go-go numbers?

My surmise is that different tax rates are going to affect things mostly at the margins, but as the baby boom moves into "income needed" years, dividend payers are likely to find a large contingent of devotees, irrespective of the tax rate (within reason, obviously.)

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194937 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 10:03 AM
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BTW, since we're talking about rates returning to where they were just over a decade ago, were people avoiding dividends at the time because of the "high" taxes, or were they just piling into Internet stocks because of all the go-go numbers?

That's a valid point. But I think it is important to realize that today's investors in dividend paying stocks obviously took into consideration the fact that the rate is 15% and look at after-tax income as the important measure. If the dividend rate increases from 15% to 43.4%, that is an enormous drop in income from the "status quo" conditions that prevailed when the decision was made.

Let's say a FL resident with $250K in ordinary income has a portfolio producing $250K in dividends. Under the current tax code, he pays $37.5K in taxes netting $212,500. In 2013, he will pay $108,500 in taxes netting $141,500. That's a 33% drop in income from investments. That individual would logically much prefer to redeploy his assets into investments that produce no current income but instead result in uneven capital gains that can be realized over time at a 23.8% capital gains tax rate.

I don't really see why a five year bond ladder is that complicated. It makes much more sense to maintain such a ladder for current income needs and replenish it yearly with capital gains generated from a low yielding portfolio, assuming of course that such a portfolio can be intelligently built with companies that actually have reinvestment opportunities and will not burn or waste the accumulating cash. Obviously Berkshire is a classic example of such an investment.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194941 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 10:26 AM
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I think an intelligent choice could involve building a five year laddered portfolio of treasury notes ...

Interesting approach, I suppose.
But given that the nugatory .625% return on even the full 5 year notes is
still a maximum of a negative real return, I wouldn't bother.
Given the "optionality" advantages of having pure cash (buying stuff on
sale in case of a big crash), I'd simply have a pile of cash (or short
term bills in a variety of credible currencies). Simpler, too.
A five year bond can drop in value quite a lot in a bond panic, so you
have to plan on holding it to near maturity.

But the problem is that a lot of people simply need the income, and
don't have the cash to have both a no-income ladder (or cash) for income
plus another bunch of cash for a set of longer term investments.
On the upside, it makes retirement math a lot easier when 100% of your portfolio is earning nothing!

Jim

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194942 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 10:40 AM
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<o>I think an intelligent choice could involve building a five year laddered portfolio of treasury notes (or better yet, I Bonds for at least part of the portfolio)

This is not what Jim Grant would approve. You can't just go out and buy I=bonds. I am not here to lecture you on I-bonds but you do need some tuition on the subject,

realizing capital gains in the process and paying tax at a low rate.

Before you can do that you have to have capital gains. Companies to not declare capital gains, but they do declare dividends.

G H U

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194943 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 10:50 AM
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You can't just go out and buy I=bonds. I am not here to lecture you on I-bonds but you do need some tuition on the subject,

No lecture required, thanks. I am quite aware of the I bond purchase limits which is why the word "part" was included in my comments.

A taxpayer may purchase up to $10K of I Bonds each year plus $5K directed from a tax refund (easily enough engineered by overpaying tax in that amount on December 31).

The I Bond system can be further "gamed" by making purchases near the last day of any given month which entitles the holder to interest for the full month. Sales should be made close to the first of the month.

Further "gaming" is possible by using I Bonds as substitutes for one year treasury bills willingly accepting the three month interest penalty since even after paying such penalty the return is far in excess of the yield available on a one year treasury bill.

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Author: knighttof3 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194946 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 12:47 PM
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After reading this whole thread, it appears that nobody believes in the concept of homemade dividends.

For income, you could:

1) sell a part of your portfolio each year, and take a capital gains tax hit (23.8% max marginal, IIRC, after US tax cuts expire) on no-dividend stocks rather than 43.4% on dividend from div stocks. Like Berkshire. It is probably / definitely a bad long-term strategy (quite simply because it's the opposite of DCA); but if you need income and want to pay 24% rather than 43% in taxes on it, it is not bad.

2) Sell covered calls on your no-div stocks. They will be priced higher than calls on equivalent div stocks (in theory). Plus, if the stock gets called away, you still only pay capital gains. Of course, you will pay marginal rate (35% max after the "cliff"? I don't know). Still, it unshackles you as an income investor to have to buy only div stocks.

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194947 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 12:52 PM
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I don't really see why a five year bond ladder is that complicated

It's not that complicated that it takes a room full of quants with fancy letters after their names to do it. It's just more complicated than buying a basket of divvy payers and cashing the checks. To do the five-year ladder part is easy. To do the "cash out what has achieved fair value, except in good years, blah blah blah" takes significant following of the market, calculations and guesswork as to which investments are peaking, and when, and divining redeployment alternatives on an ongoing basis.

My theory is that people are lazy. They don't turn off the water when brushing their teeth, they don't switch off the lights when leaving the room for a few minutes, and they're not going to spend this kind of time on their portfolio. Oh sure, some will, and some taxophobes will divine every last dodge to try to beat the tax man. Most won't.

I'm not saying tax policy won't have some effect; obviously it will. I just don't think it will be so stunning as to direct massive flows of money out of dividend paying stocks into...what? Bank accounts? Money markets? CD's paying 1%? Gold?

(I also dispute that most dividend receivers are in the situation you describe: earning $250k and getting passive income of $250k. That is looking at the tiniest sliver of humanity, whose behavior won't have a great effect on the market, again, especially considering the alternatives.)

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194948 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 1:07 PM
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I also dispute that most dividend receivers are in the situation you describe: earning $250k and getting passive income of $250k.

Never suggested that the scenario is typical. Obviously that hypothetical person is a "1 percenter". I used the example figures to ensure that the taxpayer would face the top rate. Obviously the impact is less severe for someone in the 28% bracket but even then that's almost twice the tax hit vs current policy. There are plenty of retirees with pension income that is sufficient to land in the 25-28% brackets and face taxation on dividends at their marginal rate.

I agree that people are lazy and generally slow to change strategies but even the laziest couch potato may be motivated to turn off the TV and give this issue a hard look in January...

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194949 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 1:11 PM
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I also dispute that most dividend receivers are in the situation you
describe: earning $250k and getting passive income of $250k.
That is looking at the tiniest sliver of humanity, whose behavior won't have
a great effect on the market...


I agree with pretty much all of your post, but perhaps not the last bit.
Sure, such folks are a very small fraction of the population, but they
are a very large fraction of aggregate dollars invested so they may be
the ones that matter to the pricing of securities.

Jim
"In the 1% and proud of it— Vote the Dagny Taggart/Gordon Gekko ticket!"

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194950 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 1:14 PM
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Vote the Dagny Taggart/Gordon Gekko ticket!

Dagny, the model of integrity, would grow to despise Gordon although probably not before Ayn Rand documented an affair in excruciatingly weird language.

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Author: knighttof3 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194951 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 1:30 PM
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Vote the Dagny Taggart/Gordon Gekko ticket!

Dagny, the model of integrity, would grow to despise Gordon although probably not before Ayn Rand documented an affair in excruciatingly weird language.

Ryan = Taggart (the Ayn Rand connection)
Romney = Gekko (the Wall St financier)

I can't quite picture Eddie Munster getting it on with Mr Magic Underpants.

Whom are the 99% are voting for?

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194952 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 1:38 PM
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Ryan = Taggart (the Ayn Rand connection)

If Ryan is Dagney Taggart, Romney is more like James Taggart. But I don't want to go there ...

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194953 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 2:02 PM
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After reading this whole thread, it appears that nobody believes in the concept of homemade dividends.

No, actually that was exactly my point regarding a five year fixed income ladder. The only difference is that rather than liquidating shares at a fixed interval to generate income regardless of stock valuation, an investor would attempt to sell at "good" prices and refrain from selling at "bad" prices. This flexibility would come from the security of having five years of income in fixed income. The goal each year would be to create enough "homemade dividends" to replenish the fifth year of the fixed income ladder ... and to do so with securities trading at reasonable valuation levels.

I realize that a five year ladder of treasuries yields very little right now so there is some cost in this approach but if executed consistently over time, I think that the advantage of the lower capital gains tax rate would overwhelm any disadvantage associated with holding five years of low to zero yielding fixed income securities. And, on the margin, some things can be done to improve the situation like putting a modest amount in I Bonds each year, using "introductory" savings accounts yielding 1% that have FDIC insurance, etc.

Anyway, this could all be irrelevant if Romney wins and current rates remain the same. Today's Gallup poll of likely voters has him up 52% to 45%. But any way you look at the electoral college map, Obama could still prevail through many plausible paths to victory even if he loses the popular vote.

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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194954 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 2:08 PM
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it no longer looks like obama can win huge and take the senate and house with him but that was the issue 60 days ago. IF that happened the 1 % ers would have been large sellers before year end, including brk.

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Author: knighttof3 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194955 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 2:19 PM
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Anyway, this could all be irrelevant if Romney wins and current rates remain the same. Today's Gallup poll of likely voters has him up 52% to 45%. But any way you look at the electoral college map, Obama could still prevail through many plausible paths to victory even if he loses the popular vote.

I don't think the Presidential election will decide the fate of taxes, Bush tax cuts, fiscal cliff, etc. Congressional politics will. Of course, what you say is valid in that the President's bully pulpit will influence Congress's action (or inaction.)

I still maintain (with an increasingly tremorous yet courageous voice) that there will be no fiscal cliff. No politician wants it. The economy can't take it. There will be some last-minute compromise that involves borrowing umpteen gobs of money to finance tax cuts and defense / entitlement spending. IOW, business as usual.

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194957 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 3:00 PM
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Rationalwalk, everything you advocate is unworkable in practice. Even your idea to take cap gains in ladders of I-bonds doesn't work because it can't be done. If you still believe what you are peddling show us how many dollars in taxes can be saved by setting up one I-bond ladder.

If you are interested in getting Mr. Market to make you rich on a portfolio of Berkshire stock, I am firmly convinced the price of the stock would go up if it paid a dividend. The stock has a little momentum just now and once this has spent itself I am out and into more dividend stocks. Once dividend stocks are more heavily taxed, I will need more dividend income and as a BRK stockholder I know where to get it. Not from Warren. He keeps it all himself.

G H U

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194958 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 3:12 PM
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Even your idea to take cap gains in ladders of I-bonds doesn't work because it can't be done.

I think you missed my point. I was referring to taking capital gains in a taxable portfolio of stocks, paying taxes at the capital gains rate, and investing the proceeds in a fixed income ladder. The income from the fixed income ladder will, of course, be taxable as ordinary income. However, to the extent that I bonds can be used as a part of the strategy, federal taxes are deferred until the point when the I Bond is cashed in. And of course, both I Bonds and other treasury securities are exempt from state and local taxes.

everything you advocate is unworkable in practice.

I'm not sure why it is unworkable to create a fixed income ladder. This is not my idea and is a fairly standard financial planning strategy. But to each his own ...

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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194959 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/18/2012 3:20 PM
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<< Not from Warren. He keeps it all himself.>>

brkville brother , he keeps it all to himself to pay himself that huge salary , that greedy 1 % er !! bro, nobody owns brk expecting yield !! take care.

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Author: commoncents33 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194970 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/19/2012 3:18 AM
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With the new dividend laws taking effect if Obama wins I place the odds of getting them along the lines of close to zero. Imagine being taxed on dividends at the highest possible rate which I believe is going to be around 43%. It goes way against Buffett's long term compounding strategy, which he believes that very long term shareholders should be able to benefit from instead of just giving it away forcefully through taxes.



Wait...I thought I Buffett wants us to pay more taxes.

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Author: commoncents33 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194971 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/19/2012 3:28 AM
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My theory is that people are lazy. They don't turn off the water when brushing their teeth, they don't switch off the lights when leaving the room for a few minutes, and they're not going to spend this kind of time on their portfolio. Oh sure, some will, and some taxophobes will divine every last dodge to try to beat the tax man. Most won't.



Can't disagree with you there.

But I doubt those "lazy" people are participating in this discussion board. And even if they are, seems like we should be debating strategy and issues for the brighter bulbs, no?

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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194973 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/19/2012 7:47 AM
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<< Imagine being taxed on dividends at the highest possible rate which I believe is going to be around 43%.>>

some of you are forgetting state taxes. worst case munger could be looking at 50 % plus combined in CALI on div income. if obama wins there is zero chance brk will pay a meaningful div, as it should be. my guess, cap gains and divs will be maxed out at 25 % at the FED level or so unless Obama wins very big.

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194996 of 211768
Subject: Re: Compounding Machines vs. Dividend Cash Cows Date: 10/19/2012 10:24 PM
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I can liquidate shares at a time of my choosing based on my assessment of the valuation of the shares and my tax situation.

Good luck, RW< ypu are making your plan for harvesting the compounding of IV, BC, etc. without Mr. Market, just as I enjoy my dividend income independently of the consent of Mr. Market. To each his own.

G H U

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