Comments on: Improve your investment returns (by lowering your taxes) http://moneymerc.com/2008/11/10/improve-your-investment-returns-by-lowering-your-taxes/ a personal finance blog dedicated to little finance decisions with big impact Tue, 25 May 2010 01:59:04 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: DS http://moneymerc.com/2008/11/10/improve-your-investment-returns-by-lowering-your-taxes/comment-page-1/#comment-76 DS Sun, 23 Nov 2008 12:50:01 +0000 http://moneymerc.alexbenke.com/?p=36#comment-76 Thanks! Thanks!

]]> By: Alex http://moneymerc.com/2008/11/10/improve-your-investment-returns-by-lowering-your-taxes/comment-page-1/#comment-73 Alex Fri, 14 Nov 2008 02:48:21 +0000 http://moneymerc.alexbenke.com/?p=36#comment-73 Hey DS, Yes it's true, some preferred stocks do pay seemingly ridiculous dividends. With the credit markets the way they've been, sometimes issuing preferred stock is the only way companies can raise money. Big banks like Citigroup and JPMorganChase used this method earlier in the year. For example, Citigroup's issue from January is paying 8.5%. Is it a good deal? Is 11% better? Well let's remember the cardinal rule of investing: more return = more risk. There is a reason they are paying rates like this. This historically sleepy, safe income investment can quickly turn into a more risky one. Citigroup's shares came out at $25, paying that 8.5% dividend. Preferred stocks are known for low volatility, but it's now worth around $17. Woops. Now your income investment is getting it's principle eaten. And there is default risk too: if a company files for bankruptcy protection, preferreds holders are 2nd in line to not see any of their money again (right behind common stock holders, but before bond holders). Then there's the control issue - most preferreds have call provisions that start, say, 5 yrs after issue. So if the company can get financing elsewhere for less than that dividend, they can call it away from you. The ball is in their court, not yours. Yes, normal people can buy preferreds, through brokers, and even online brokerages. But know the risks first. Now let's consider why a CEO is saying he's buying his own company's preferred stock... sound like a bit of a conflict of interest to you? His company needs the money to operate and succeed, and (hopefully) his bonus depends on that success. You better believe he'll be shouting about his great stock in that open forum! Lastly, taxation - different preferred issues are taxed differently.. some get preferential capital gains treatment like common stocks, others don't. Check with the selling broker. If it does get preferential treatment (15% on gains.. for now), then it should be in an after-tax account. Otherwise it's just like a bond, and should be in a deferred tax account. (BTW - "many" investments is not necessarily a good thing!) Hey DS,
Yes it’s true, some preferred stocks do pay seemingly ridiculous dividends. With the credit markets the way they’ve been, sometimes issuing preferred stock is the only way companies can raise money. Big banks like Citigroup and JPMorganChase used this method earlier in the year. For example, Citigroup’s issue from January is paying 8.5%. Is it a good deal? Is 11% better?
Well let’s remember the cardinal rule of investing: more return = more risk. There is a reason they are paying rates like this. This historically sleepy, safe income investment can quickly turn into a more risky one. Citigroup’s shares came out at $25, paying that 8.5% dividend. Preferred stocks are known for low volatility, but it’s now worth around $17. Woops. Now your income investment is getting it’s principle eaten. And there is default risk too: if a company files for bankruptcy protection, preferreds holders are 2nd in line to not see any of their money again (right behind common stock holders, but before bond holders). Then there’s the control issue – most preferreds have call provisions that start, say, 5 yrs after issue. So if the company can get financing elsewhere for less than that dividend, they can call it away from you. The ball is in their court, not yours. Yes, normal people can buy preferreds, through brokers, and even online brokerages. But know the risks first.
Now let’s consider why a CEO is saying he’s buying his own company’s preferred stock… sound like a bit of a conflict of interest to you? His company needs the money to operate and succeed, and (hopefully) his bonus depends on that success. You better believe he’ll be shouting about his great stock in that open forum!
Lastly, taxation – different preferred issues are taxed differently.. some get preferential capital gains treatment like common stocks, others don’t. Check with the selling broker. If it does get preferential treatment (15% on gains.. for now), then it should be in an after-tax account. Otherwise it’s just like a bond, and should be in a deferred tax account.
(BTW – “many” investments is not necessarily a good thing!)

]]> By: DS http://moneymerc.com/2008/11/10/improve-your-investment-returns-by-lowering-your-taxes/comment-page-1/#comment-71 DS Thu, 13 Nov 2008 03:47:52 +0000 http://moneymerc.alexbenke.com/?p=36#comment-71 Interesting post. I hadn't thought about the implications of different investments in different style accounts before. Though, I don't have many investments yet anyway...hopefully soon! Question for you - I recently heard the CEO of a particular company say in an open forum (ie. this isn't a hot tip!) that he was buying preferred stock in his company because the dividend was something like 11%. Could that be right? Can normal people buy preferred stock like Mr. CEO?? If so, which account should that go into because it pays "income" like a bond, but is actually a stock? Interesting post. I hadn’t thought about the implications of different investments in different style accounts before. Though, I don’t have many investments yet anyway…hopefully soon!

Question for you – I recently heard the CEO of a particular company say in an open forum (ie. this isn’t a hot tip!) that he was buying preferred stock in his company because the dividend was something like 11%. Could that be right? Can normal people buy preferred stock like Mr. CEO?? If so, which account should that go into because it pays “income” like a bond, but is actually a stock?

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