Sunday, January 21, 2007

Dividends - not just for Fat-Cats

There has been some talk that the Democrats will try to undo the tax cut for stock dividends. This might be one of the biggest economic blunders the Dems could ever inflict on the American public.

The result of an increased dividend tax is that the market will value those dividends (and the stocks that pay them) less. Less value means less "demand" for dividend paying stocks, and stock prices will go down.

Message to America - if you have a 401k plan, you almost certainly own some of these dividend paying stocks. The Dems will reduce the value of your retirement plan if they are allowed to do this.

Moreover, consistent dividend payment has become the gold standard of a quality, long-term investment stock. Dividends are part of the answer to stock speculation - we want to value stocks in part by how much money they will pay us to own them. We need to put slightly less emphasis on their current market capital value which, in the complete absence of dividends, is a ponzi-like system that we witnessed in the 90's tech bubble.

No comments: