Problem: Should I buy more dividend-paying stocks if dividends are going to be tax-free?
Strategy: Don't make your portfolio overweighted in dividend-paying stocks based on proposals that might or might not become law.
Wilson Rosebraugh, a financial consultant with Hilliard Lyons, says eliminating individual income taxes on dividends is the most significant provision of President Bush's new tax cut plan.
Taxing dividends currently amounts to double taxation: Companies pay income tax on their profits, part of which get paid as dividends, which are then taxed as investor income.
Ending this double taxation would have a long positive effect on the economy. U.S. Treasury officials estimate that such a change would return about $20 billion to the economy this year.
Under the proposed change in tax policy, a company's managers and shareholders would share a common interest in creating and paying dividends.
That mutual interest, in turn, should benefit companies and investors by boosting corporate profitability, improving the accuracy of financial statements and strengthening corporate governance.
That could have a positive effect on all stocks - so you might benefit even without bailing out of nondividend-payers for the sake of stocks paying dividends.
Also, reconsider why you are invested in the first place. Usually, investment decisions are made for reasons other than tax consequences, such as long-term growth or stability.
Still, with a change in the tax policy probably leading to more companies paying dividends, maybe you someday would want to reconsider your investing strategy.
But remember, it's all still just a proposal right now.
Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary. Planners: Share your unique tips with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati, OH 45202, or e-mail firstname.lastname@example.org.
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