Reinvested Dividends Tax


Posted by Admin

Reinvested Dividends Tax

Reinvested Dividends Tax

More than ever before the hunt is on for income by investors, particularly in the developed world. Cash on deposit at the bank pays a negligible amount of interest and even safe government bonds don't pay out that much either. Consider for example, 10-year US Treasuries; they now yield less than 3%. Even Gilts or British government bonds yield under 3% and that's with UK inflation running at 3-5%, depending which official measure is used.

Yield is the annual rate of return on an investment expressed as a percentage. So a share or a bond costing US$105 that pays out a dividend or coupon of US$5 a year yields 4.76%.

Although it is challenging to find relatively safe investments that generate decent levels of income it is not impossible. They are out there and the stock market is great hunting ground for income seekers, with literally thousands of stocks paying dividends. The great news is that more and more companies across the world are beginning to tune into investors' need for income and are becoming dividend stocks.

According to Fund Strategy magazine, cash on company balance sheets across America, Europe and Japan is at a 60-year high and this will spur greater dividend pay-outs, mergers and acquisitions and share buy-backs. Meanwhile, JPMorgan Asset Management recently said that improvements in corporate governance across many emerging market countries is seeing a greater focus on paying out dividends to shareholders.

However, selecting the right stocks, those that offer relatively safe levels of income, does require a bit of home work. It is important for instance not to just focus on the level of income or yield which they pay out. A typical mistake made by novice investors is to invest in those paying the highest yields. Although not always, but those stocks that offer very high yields usually do so for a good reason.

Often it is because the company in question has very poor growth prospects or faces a damaging law suit for example or has bad management and ultimately maybe the dividend itself is in danger of being cut or scrapped. These shares are therefore sold down and because the share price is low, the pay-out or yield looks generous. In effect the higher yield is reflecting the risk that the dividend could be cut or scrapped.

For long-term dividend stock investors these types of companies should be avoided at all cost. Investors face the prospect of not only seeing their income cut, but could face permanent capital loss as well.