Should the changes in tax law affect my investment strategy?
Last fall as we headed into the new year I heard a lot about upcoming tax law changes for investors. First on the list was an increase in the tax rate of ordinary dividends. I had three questions about this change, number one of course was how does this directly affect the taxes I pay and should I change some of my dividend paying stocks for some with more capital growth potential? Since capital gains and dividends are taxed the same under the new rules, this is really a question about paying taxes yearly a little at a time, or deferring them until I sell. Since everyone has different investment goals and tax consequences the answer will vary by person. My own problem with this is that you can't always control when you sell. If a stocks price starts to go south you may have to sell quickly to prevent a loss which is even worse than paying taxes. The second question is how are others going to change their investing style? Both markets and individual stocks move for reasons of perception/momentum as well as actual business/financial changes in value. My original thought was that traders would wind up holding stocks longer to net the same profit after taxes. I haven't seen any evidence of this occuring on a mass scale yet. The third question is will individual stocks change their policies with regaards to dividends? Will managers/directors decide that they can reinvest the money and earn more for an investor than what the investor can do on his own after losing some to taxes? So far I have not heard of any of the big dividend payers lowering their dividends while maintaining or growing their revenue. It is harder to tell if dividends could be raised more than they have been.
My conclusions so far are that mostly I don't know. Three months is enough time to notice major policy shifts, but not enough to notice incremental change. The markets are up in price, which in turn lowers overall dividend percentage but doesn't really prove anything. Individual stocks usually raise dividends based on revenue/profit not simply on a stock price increase. Similarily, with prices going up investors will tend to ride them all the way to the top. Holding a stock longer in this market doesn't prove anything. Even though the tax increases have been in the news, for investors, the actual pain won't come until next April 15. Since capitalism is based on making and keeping for yourself as much as possible. I think eventually investors will change to or invent different investment strategies. I will continue to watch this, but I think for now most people are investing the way they know best and just ignoring the increases.
If anyone has seen a trend change, or has changed their own strategies, I would love to hear about it.
Thank you for taking the time to read this.