Wall Street fecha semana sem rumo. Grandes tecnológicas pressionam

[Camisa Roxa]

The biggest news of the day is the buzz behind President Bush's economic stimulus
plan. While the plan itself is multi-faceted, the part we're most interested in is
the potential repeal of dividend taxes. On the surface this sounds like a great
benefit to stocks. However, experience has taught many of us that hype is a powerful,
yet short-lived, market force. A closer look is warranted.

The theory is that investor's bottom lines would be increased in when more of their
investment income would stay in their pocket rather than get paid out in taxes. And
when investors have more money in their pocket, they are more likely to spend it, and
thus stimulate the economy. All of this is true. Unfortunately, it's also true is
that most investment income is derived from capital gains, which will still be taxed
at their current rate (as of the most current plan). On average, only about 5 percent
of personal income is created by dividends. On top of that, much of that 5% is earned
in tax-free retirement accounts already. So the immediate impact of a dividend tax
repeal may be minimal, if even noticeable.

That issue could be somewhat helped if more companies started paying dividends, which
many investors think will happen. But the tax benefit is currently only extended to
the individuals who receive dividends. The companies who pay them are still going to
be taxed as usual. In fact, it's a lose/lose situation for most corporations - not
only would these companies sacrifice tax-free resources that could be used in
research, development, and business growth, they would subject themselves to taxation
just by paying shareholders. Knowing this, it's not likely that many companies will
now opt to pay dividends if they haven't already.

So, the issue now becomes one of finding companies that DO pay dividends. Ultimately,
though, the issue becomes one of how much shares are yielding (paying) on a
percentage basis. The current average yield on stocks is about 1.5 percent, but that
can go as high as 6.0. Let's say for the sake of argument that yields are about 5
percent. That means that if a share is $20, then the annual dividend is $1. Although
most dividend paying companies earn slightly more than they actually pay out, let's
assume that profits and the dividend are equal. If the demand for these shares goes
up causing the per-share price to go to $40, how much will the company be able to
earn and payout per share? Not $2..the earnings are only determined by how well the
company performs. The price of these shares, and therefore the yield, are determined
only by investors who buy and sell these shares. If you pay $40 for a stock, you
still can't make the company do any better than the $1 per share they were earning.
With your yield now at 2.5 percent, owning that stock doesn't seem as attractive.

This is not to say that the entire stimulus package is a bust. In fact, there are
some great features of the plan that are going to put a lot of money back in the
pockets of taxpayers. And even the dividend tax repeal is a boost. It's just
important that we understand the real impact of dividend taxation removal, and not
overestimate what the long-term and short-term effect will be. There's a lot of hype
about today's announcement. I encourage all of us to consider it logically, and not
get swept up in the frenzy.


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