Paying less tax would seem, at first glance, to be a change that would please most investors. But since the new Federal tax code, which was applied retroactively to the beginning of 2003, applies to some but not all stock dividends, many are moaning in frustration at the new rules.
The Wall St. Journal reported on February 19 that "brokerage firms and mutual-fund companies are having a harder-than-usual time telling customers exactly how much of their dividend income qualifies for the lower rate. That in turn means that a larger-than-normal number of the 1099 tax forms that financial companies mailed to investors a few weeks ago listing their 2003 taxable dividend income are likely to be wrong, experts say."
What this means for you is that you should check the 1099s sent by your brokerage very carefully and wait to find out if you'll be receiving an amended 1099 from your broker. If you file your taxes early and then receive a restated 1099, you may have to file an amended tax return as well.
NAICís new Take Stock software makes it very, very easy to learn and apply NAIC's time-tested stock-picking techniques. It's simple enough for a beginner to get started immediately and convenient enough to help even advanced investors get a quick read on a stock.
Most of us know someone -- a granddaughter, nephew, neighbor, father, or friend -- whom we wish was more savvy about investing. The perfect gift for that person is NAIC Take Stock, a great first step on the path of financial independence. For more details, please call NAIC at 1-877-275-6242, ext 0, or visit http://www.iclub.com/takestock.
Changes to the tax laws in JGTRRA of 2003 define certain dividends as "qualifying" for lower tax rates if the shares are owned for 60 days in the window starting 60 days before the ex-dividend date and ending 60 days after the ex-dividend date.
The ex-dividend date is the earliest date on which an investor can sell a stock paying a dividend and still receive that dividend. The ex-dividend date is two trading days before the record date and typically between two and five weeks before the payment (transaction) date. The SEC provides more information on ex-dividend dates in this article on their web site at http://www.sec.gov/answers/dividen.htm.
If you have entered security dividends in the Cash Section of your club accounting software, you need to delete them from the Cash Section and then re-enter all of them in the Security Section / New Transaction / Cash Distribution (or Reinvested Distribution) and include the ex-dividend date. If they are already in the Security Section, you still need to go back and put in the ex-div date. This applies to all dividends received on or after January 1, 2003.
If your broker statement does not include the ex-dividend dates in their statements, you can find them on the Yahoo! Finance web site at http://chart.yahoo.com/d.
Enter start and end dates of 1/1/03 and 12/31/03, select the Dividends option, and enter the ticker for your security. Click GET DATA, and the list that appears will include not only the ex-dividend date of each dividend, but the per share value of that dividend (rounded to the nearest whole cent).
For more info on tax law change and why it effects Club
Accounting, see The Tax Cuts: What do they mean for your club?.
The most under-used feature of Investor's Toolkit 4 is the Challenger.
To comply with NAIC's admonition to stay fully invested at all times, it becomes necessary to replace any stock sold from your portfolio with another of equal or better quality. However, from a value standpoint you should always look for a higher return from the replacement stock than you expected from your original holding. This is where the "challenge" comes in, challenging the stock you own with the potential replacement.
Before you initiate a Challenge, you should make sure that you have updated Stock Selection Guides for both companies -- your current holding and the possible replacement.
Then, to use the Challenger, look for the "Challenge" icon located on the Investor's Toolkit 4 button bar. It is easily identified by the image of two boxers challenging each other. A single click on that button will access the Challenge screen.
The "Challenge Parameters" screen that appears is where the fun begins. On the left side of the screen, select the company that you're thinking about replacing. Enter the number of shares to sell, the average price per share and the tax rate that applies to the proceeds of the sale.
Next, select the "Challenger" company on the right side of the screen. Enter the type of brokerage involved in the transaction. Toolkit automatically calculates the transaction costs when "Full Service Broker" or "Discount Broker" is selected, using an average of the brokerage fees charged by many of the major Full Service or Discount brokerage houses in the country. However, you can choose the "Flat Rate" option to enter the actual commissions for Sales and Purchases charged by your own brokerage firm.
Once all information is entered, click the OK button to see the results of the Challenge. (The OK button won't allow you to continue to the next screen unless all of the information pertaining to the sale of the stock is appropriately entered. If "Flat Rate" is selected, then you must enter both the Sale and Purchase rates for the OK button to be made active.)
Based on your projected results for both companies, Investor's Toolkit calculates the expected returns from each. The left side of the screen displays the numerical returns for the next one to five years, and the right side visually plots the returns on a chart. Here you can see just how long it will take for you to make up the immediate loss you may sustain upon selling your current holding, as well as how much better (or worse!) you might fare if you choose to go ahead with the swap.
The results of a Challenge are often surprising, but can be very useful in upgrading your portfolio to achieve the best returns from your stock holdings.
(Editor's Note: NAIC's Stock Selection Guide is the cornerstone of the Investor Advisory Service, and is used by Ralph Seger and the analysts at Seger-Elvekrog to select and follow each company included in the newsletter. In this issue, we are pleased to offer the first of a multi-part series of tips that delve into the basics of the SSG and how it can best be used to identify stocks for your portfolio.)
When the late George A. Nicholson, Jr. worked with Tom O'Hara and others to form NAIC in 1951, they formulated some basic principles for investment clubs to follow in investing in the stock market. Among those was to "buy growth stocks." The Visual Analysis ratio chart on the front of the Stock Selection Guide (SSG) enables the user to determine whether or not a company can be considered a growth stock.
George was also a great believer in management's ability to produce excellent results. This factor has been summarized as follows: "the three most important factors about a stock are management, management and management". When George would bring in a stock for consideration by the BI Editorial Advisory and Securities Review Committee, he invariably would open his discussion with observations about management.
There are several initial observations the investor should make with the SSG, beginning with the semi-logarithmic chart on page 1.
Does the Visual Analysis show a persistent growth rate of sales, pre-tax profits and EPS that are significantly superior to the overall economy and yet sustainable? Other things being equal, look for a company able to generate an annual growth rate of sales or revenue in at least the teens that will tend to produce superior investment performance providing it can be purchased at a reasonable P/E ratio. Cyclical stocks are usually an exercise in market and economic timing, a technique that seldom works. Companies in mature industries, such as basic materials, and those that make products with cyclical demand are not growth situations.
It is a fairly elementary and fundamental exercise to make a Visual Analysis of a company using the ratio chart on the front of the SSG. If your investment objectives include building a portfolio of growth stocks, then quickly abandon investigation of cyclical, ex-growth and no-growth companies. Do not expect "fallen angels" (former growth companies) to return to their glory days. Many companies are promoted as recovery situations or cyclical "upward bounce" by brokers seeking both a buy and sell commission for a trade. Use the Visual Analysis of the SSG to screen out the non-growth companies.
To be continued....
For more information on the Investor Advisory Service, please visit http://www.iclub.com/ias/.
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