Date Published: 5/23/2012

Hyllandresearch.com

The Fear of Taxmageddon Only Stresses the Importance of Investing Wisely.

Currently, most Americans are taxed anywhere from 0% to 15% on all dividends received. However, at the end of the year as the Bush Tax Cuts are set to expire that 15% will turn into anywhere from 28% to 43% depending on your income. This has led many to predict on how Wall Street will react. Recently in an OP-ED in the Wall Street Journal, The 2013 Fiscal Cliff Could Crush Stocks, argues that because of the incoming tax hikes, stocks will fall as much as 30% and yields on the 10 year treasury will rise to 2.3%. Goldman Sachs says GDP could drop 4%, Certain politicians, in all their obvious economic wisdom, predict companies will cease hiring, and that America will be put back into recession. I offer no prediction on what lies ahead, and I am certainly not going to argue that taxes increasing is something to ignore, but I can offer a little more comfort to an individual investor looking to mitigate their tax burden from dividend stocks and how one can benefit should these tax hikes actually go through. Lets look at the worst-case scenario: Without arguing against what I believe to be major errors in the authors logic, lets assume stocks drop 30% as he predicted because of this upcoming tax hike. Look at what some of these major dividend-paying stocks would look like after a 30% drop from todays price:

Company Pfizer Exxon General Electric Microsoft Cisco John Deere Freeport McMoran Wal-Mart Google Apple Intel

Stock PFE XOM GE MSFT CSCO DE FCX WMT GOOG AAPL INTC

Price $15.40 $57.00 $13.30 $20.30 $11.70 $53.20 $22.90 $45.20 $427.00 $400.00 $17.50

EPS (2011) 1.11 8.42 1.23 2.69 1.17 6.63 4.77 4.54 29.76 27.68 2.39

Div yield% 5.7% 4.0% 5.0% 4.0% 2.7% 3.5% 5.4% 3.5% 0.0% 2.6% 5.0%

P/E (ttm) 13.9 6.8 10.8 7.5 10.0 8.0 4.8 10.0 14.3 14.5 7.3

This is only a random, select few pick of stocks, picked for no reason other than their standing in their industry. No specific number in the table above indicates the stock should be a buy, however may clue an investor in on a source of value. Who would not buy an Intel or GE yielding 5%? Or A Microsoft or Exxon at a P/E of 7? Anyone with a long term investing horizon, able to weather short term stock fluctuations should be salivating at the prospect of picking up stocks such as these in the table above at those prices. Of course these dividend yields are deceptive, because taxes would be up to 43%. However, there is one way for investors to get around taxes on dividends, and that is a ROTH IRA. Under a Roth IRA, investors put money that has already been taxed into the account, and upon retirement can withdrawal that money with out paying any taxes. The growth, and dividends, are TAX FREE. Part of investing wisely means maximizing your tax efficiency, and a Roth IRA is a big step toward doing just that. Limits for a Roth IRA are $5,000 a year for most

investors, and should be a primary source of retirement savings behind your company match in your 401(k). The benefit of investing intelligently and minimizing taxes adds up over time. Compare below the final balance after investing $5,000 a year from age 25 until age 65, with the historical market returns (factoring in stock price appreciation and dividends) in a Roth IRA compared to a regular brokerage account. Roth IRA: $381,400 Traditional Brokerage Account: $184,570 This assumes a 28% tax rate, which may be higher or lower depending on your income, however the results clearly show how compounding interest in combination with tax-free investing is beneficial! Your final investment total more than doubles with a tax-free Roth IRA! As an individual investor, times can be scary when threats of tax increases, economic collapse and stock market plunges fills the air waves. However with a responsible retirement savings plan, the intelligent investor can sleep soundly knowing they can withstand, and even benefit from whatever comes at them.