By John Stylianou – Accountant
Investors tired of sagging stock prices have learned anew the real benefits of dividend-paying stocks. Cash dividends are money you can take to the bank. It is also reassuring to know that dividend-paying companies actually have profits and enough cash flow to pay dividends. The old premise that stock values will rise without the company’s demonstrating an ability to make a profit just doesn’t cut it anymore.
Corporate earnings have always been one of the most important factors affecting stock prices. After all, when you buy a stock, you are buying shares of a company’s future profit stream. Companies that can grow earnings quickly and consistently will command a higher stock price.
Some believe that dividends may also cushion falling stock prices. Stocks of quality companies that consistently pay dividends may hold up better in a bear market because the dividend may still attract buyers. Record-low yields for money market funds and other safe investments are currently adding to the lure of dividend-paying stocks.
There is a downside to dividends in comparison to long-term appreciation in a stock’s value. Dividends are taxed at ordinary income tax rates that could be as high as 38.6%. Compare this to long-term capital gain taxes that are generally no higher than 20%.
As part of his economic recovery plan, President Bush has proposed the elimination of taxes on dividends. There’s no assurance at this point that this proposal will pass in Congress and actually become law. Remember, too, that under current law, dividends from investments in your retirement plans aren’t taxed until the funds are withdrawn. As you make investment decisions this year, be sure to stay informed about any new or pending legislation that could have an impact on the choices you make. Give us a call if you need information or assistance.
CHECK WITHHOLDING AND ESTIMATED TAX PAYMENTS FOR 2003
If you expect a large tax refund this year, or if you’ve already received one, chances are you’re happy. But why give the government an interest-free loan? Why not keep more of your money and invest it throughout the year for your own benefit? Whether you pay your taxes through withholding or you make quarterly estimated tax payments, you can take steps now to ensure that you don’t receive a large refund on your 2003 taxes – and that you don’t owe a lot of money either.
Your tax bill in 2003 could vary from last year’s tax for many reasons. If you or your spouse get a new job or leave a job this year, your income may change. Perhaps your eligibility for the various tax credits, exemptions, and deductions that are available will change this year. If your income decreases or if you can take advantage of any of the tax breaks to reduce your taxes, you may be able to lower your tax withholding or quarterly payments and put more money in your pocket now. The opposite is true if your income rises or you lose eligibility for a deduction, exemption, or credit. In that case, you may have to increase your withholding or quarterly tax payments.
To adjust your withholding for 2003, ask your employer for a new Form W-4, and take the time to complete it carefully.
If you make quarterly tax payments, you should be aware of a change in the requirements for 2003. If your income is greater than $150,000, the prior-year safe harbor rule for 2002 required that your estimated tax payments and withholding add up to 112% of your 2001 tax liability. This year you’ll meet that safe harbor requirement by paying 110% of your 2002 tax.