‘Do not expect the fund’s quoted past performance to continue in the future. Studies show that mutual funds that have outperformed their peers in the past generally do not outperform them in the future.  Strong past performance is often a matter of chance.’

Key components Empirical Study PDF (Key pages selected)

Investors are constantly bombarded with information and news about what investments are ‘hot’ and the best strategies for ‘the new environment’ we’re in.  Unfortunately many investors fall prey to the hype and fail to understand tax implications, Government implications, and pure economics.  Deciding to torment myself, I sat down to watch Fox News and the investment show “Cashin’ In”.  What then unfolded was purely beyond my wildest imagination.

One guest suggested that everyone move to ‘Good Dividend stocks’—and frankly, why not?  Good ones are much to be preferred over ‘Bad’ ones! (a slight hint of sarcasm)

So here are a few simplistic, quick facts concerning dividend paying stocks so all of you can understand what a dividend paying stock is and what it means:

1.    Companies disburse their profits over the year through a dividend to the shareholders of the company.
2.    Companies without profits do not pay a dividend.
3.    Some companies choose not to pay a dividend because they instead re-invest the money into the company via expansion.
4.    In tough economic times (such as 2008), many banks and companies slashed their dividends since there were no profits.
5.    Just because a company may pay a 3 or 4 or 5% dividend each year doesn’t mean that the stock can’t go down 10, 20, 30% or more—thus eliminating any temporary pleasure that came from the dividend.

How About Taxes on ‘Good Dividend Stocks’?

Tax Issue #1:
Beginning in January of 2011, the favorable 15% tax on dividends will expire and the rate returns to previous ‘ordinary income’ taxation.  So what?  Well, if you earn more than $66,000 that means an additional taxation of 13% (28% total).  Now I can hear you say……”but the tax bracket is 25% Bryan.”  Not so fast!  In 2011 we revert to year 2001 tax codes. Remember also that the top bracket goes from 35% to 39.6%.

Tax Issue #2:
Come 2011, the Government has initiated a limitation in deductions and deductibility based on an individual’s income.  This will basically add an additional tax of 1.2% to most families.

Tax Issue #3:
In 2013 we get the fantastic new health care tax on investment income which will add an additional 3.8%.

In final calculations, we could expect to see on the high side a total tax on dividends of nearly 44%.  So how will such a tax complicate dividend paying stocks?  You tell me.  But with 44% higher cost of doing business, I figure many investors will be ‘less inclined’ to purchase a 5% yielding stock when in reality it will mean 2.8% after taxes.  Supply and demand then dictate a potential drop in the price of such stocks.

Does this mean I throw dividend paying stocks down the drain?  Absolutely not.  They should be a part of any investment plan as a whole. For example, if you own an index fund, you will own many companies that are paying dividends.  To have one single stocks for dividend payments only, however, is rather risky and extremely irrational (in my humble opinion).

So What Should I do?

Go back to basics and develop an investment strategy not based on the ‘pick of the day’ or the ‘fund of the week’ but instead focuses on these primary factors:
1.    What are you attempting to accomplish?
2.    How much risk are you comfortable with?
3.    Understand that 90%+ of your return will come from Asset Classes (Large US, Small US, Commodity, US Small, Int. Small, Emerging, etc) and not from mutual fund manager brilliance or skill.
4.    Learn the total cost of your investments and question “what am I getting for this?”
5.    Rebalance, Rebalance, Rebalance.

Lastly, order the 7 Deadly Investor Traps CD and learn the traps that easily wound and kill many investors.

The crazy thing is if you look at major news outlets all the titles are of doom and gloom–Proving once again we have no idea what markets or stocks will do but we can have faith in the long term success of investing across various asset classes while managing our risk.

Great Financial Times Article http://www.ft.com/cms/s/0/bb184e6a-5b9b-11df-85a3-00144feab49a.html