Note that introducing taxes into returns reducing the

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Unformatted text preview: ct is emphasized with a high dividend strategy. While the taxes on capital gains can be deferred by not trading on your winners, the taxes on dividends have to be paid each period that you receive dividends. Thus, a strategy of investing in stocks that have higher dividend yields than average will result in less flexibility when it comes to tax timing and more taxes, at least relative to investing in low dividend yield stocks for the long term. This is illustrated in figure 2.10 for an investor by contrasting the performance of a portfolio with a dividend yield half that of the market each year to one with twice the dividend yield, keeping the total returns constant.9 9 To provide an example, the average dividend yield across all stocks in 1996 was 3.20% and the total return was 23.82%. The half dividend yield portfolio was estimated to have a dividend yield of 1.60% and a price appreciation of 22.22% for a total return of 23.82%. The double dividend yield portfolio had a dividend yield of 6.40% and a price appreciation of 17.42% for a total return of 23.82%....
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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.

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