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Does this tax liability make a strategy of buying stocks that pay high dividends a
poor one for an investor who faces high tax rates? Not necessarily, for two reasons. The
first is that the return may still be higher after you pay the additional taxes on this strategy.
The second is that different parts of the same investor’s portfolio are treated differently for
tax purposes. Evan a high-tax rate investor is allowed to accumulate funds in pension plans
and delay or defer taxes until retirement. Investing your pension plan in high dividend
paying stocks then gives you the benefits of the strategy without the tax costs.
One of the perils of looking at the past is that you can miss significant changes in
the world. Much of what has been in this section about the tax disadvantages of dividends
may now truly be history since new tax legislation, signed into law in May 2003, reduced
the tax rate on dividends to 15% and set it equal to the tax rate on capital gains. The tax 40
disadvantage of dividends has clearly been much reduced if not eliminated. This will not
only affect the values of dividend paying stocks but it will also change the way many
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.
- Spring '11