There's been a lot of talk about dividends since President Bush announced his much-anticipated fiscal stimulus package.
So, what does it all mean for you? Well, if you're an investor, you're probably pleased to learn that a focal point of the plan would allow for a federal income tax exemption on your dividend income.
This means, should the plan become law, income-generating stock dividends could become more attractive than ever and a key factor in how you choose stocks in the future.
Although it could be months before the bill actually passes, tax cut or not, a dividend strategy is smart.
In fact, dividend-paying stocks outperformed their non-dividend-paying peers for the past three years.
Between March of 2000 and December 2002, non-dividendpaying stocks dropped an average of 66.2 percent (on a capitalization-weighted basis) while stocks paying dividends dropped a much lower 15.6 percent on a total return basis.
Their income-generating characteristics have provided some meaningful defense in a bear market.
So what steps should you be taking now in light of the proposed legislation? Begin by reviewing your current asset allocation strategy as any change could affect your entire investment portfolio.
And, consider the following points.
Stock-picking consideration: If you want to take advantage of the possible tax elimination or reduction on higher-yield stocks, stick with investment-grade companies.
Traditional high-dividend-paying companies like utilities are not the only ones worth considering.
Some companies with no dividends or low dividends, but strong fundamentals, may begin or increase dividend payouts.
Conversely, some companies paying the highest dividend yields are suffering from financial woes that could further depress their stock prices.
You may want to avoid stocks that sport high yields mainly as the result of weak fundamentals.
Funding your retirement: Dividends could play a key role in your retirement strategy, so don't ignore 401(k) and IRA accounts.
If the proposal were enacted, these accounts could become better vehicles for holding taxable fixed income investments than income-producing equities.
The tax benefit would narrow somewhat, but they would still be advantageous due to the tax-free reinvestment of interest from taxable fixed income securities, as well as the avoidance of interim capital gains taxes on the purchase and sale of common stock.
Keep in mind dividends and their proposed tax treatment have raised many issues that have yet to be resolved.
The President's tax proposals could undergo significant changes before they are enacted.
Even then, tax-related issues are rarely black and white and are almost always complex in their details.
Speak with your tax advisor about how the tax law changes may affect you.
Understand the fine details of your personal tax situation, the laws and your investments before you take any action.
(Smith Barney does not give tax or legal advice.
Please speak to your tax and legal advisors for such guidance.) Kathy DiCenso, a certified financial planner, is a financial consultant with Smith Barney in Reno.
