Even in a time of rising rates, utility stocks have their place in a portfolio, as a form of diversi...
Dividends Are the Tickets to Wealth
05/23/2007 12:00 am EST
Mark Skousen, editor of Forecasts and Strategies and other newsletters, advised attendees at last week’s Las Vegas Money Show to focus on dividend-paying stocks in their portfolios.
When a company starts paying dividends it’s sending out a message: “We have arrived.” And every company that begins a dividend program has a rising-dividend policy—they want to increase that dividend over time, they want to keep you as shareholders. Once the company says we have to cut our dividend or we’re not going to pay our dividend, investors will leave in droves. It’s a disaster.
By stressing dividend investing, you avoid all the non-dividend-paying stocks that are going into the tank eventually. Not only do dividend-paying stocks outperform dramatically, [there is] greater volatility in non-dividend-paying stocks. The dividend-paying stocks—that’s where the action is and that’s where people are really making money.
[So,] invest in high-dividend-paying stocks. The WisdomTree Dividend Top 100 (NYSE: DTN) and the WisdomTree International Dividend Top 100 (NYSE: DOO) [are two ETFs] I recommend. DTN has only been around for more than a year and it’s already outperforming the Standard & Poor’s 500 index. If you invested in DOO, this one is up over 40% since its inception in July last year. The S&P is up around 20%. (Both were trading near their all-time highs Wednesday morning—Editor.)
Dividend capture strategy is a new technique that has become much more popular in the last couple of years. You buy stocks on a short-term basis, you capture the dividend, and you sell the stock. Then you find another company that’s about to pay a dividend—a special dividend or a regular quarterly dividend—you buy that and you sell it right after you capture the dividend.
You have to hold the stock for 61 days to qualify for the maximum 15% tax rate on the dividend. So it’s a way to convert a short-term capital gain that would normally be taxed at full income tax rates of 35% or higher into a dividend. [Because] you’ve held it for 61 days, you only pay 15% tax on it.
I’ve been recommending the Alpine Dynamic Dividend fund (ADBDX)—last year it had a legitimate 13% yield that qualified for the 15% tax rate, plus the total return was 22%. So their strategy was so successful they were able to get a capital gain on top of this extremely high dividend.
You should look at the Alpine and other dividend-capture strategies as primarily a way to convert short-term capital gains to dividends. It’s a tax strategy and it’s a way to get a high dividend rather than look for growth returns in your portfolio.
In a bear market these funds will drop very sharply and in fact you might find the premiums disappear on the closed-end funds if people go through a major bear market. I would use a closing stop to protect you.
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