Tax Time & Earnings Season

For all the procrastinators out there the deadline is near.  In fact, this year I was one – completing mine yesterday.  This season brings to mind some of the best practices compiled to minimize – or delay – the tax hit, thereby maximizing disposable income published by the Dividend Diplomats.  Though geared towards wage earners, I can be considered a poster child of these practices as one migrates from the accumulation phase of investing.  Over the years the use of many of these strategies have resulted in continued savings well into retirement.  Case in point being a 2017 Federal effective tax rate of  8.04% on a six figure Adjusted Gross Income ($156 of which was earned income).  Take advantage of all of the breaks provided in life as early as possible to reap the rewards (true in investing as well).

Which brings us to today’s primary topic.  Inquiring minds have been speculating on forthcoming moves regarding return of capital to shareholders – particularly with the “windfall” bestowed on them by the new tax plan.  The two most visible methods (to us shareholders) are through buybacks and dividends.  Rarely a day goes by that a buyback isn’t announced.  While the theory is sound, the reality is that most CEOs are poor stewards by buying shares that are overpriced.  Kind of like the buy high – sell low model.  I personally discount any immediate benefit to these announcements choosing instead to identify the decrease in outstanding shares over time.

Dividends, on the other hand, are tangible and arrive in three flavors; regular, special and stock.  Although any of these are welcome, special dividends tend to be more of either profit sharing or one-off events.  During the first quarter, my portfolio was the recipient of more special dividends than the entirety of 2017.  Is this a testament to the uncertainty surrounding the longevity of the new tax law with the rumored coming of the ‘blue wave’?

My favorite is the stock dividend as these are normally executed as stock splits rendering the event non-taxable capital gains kick-in when sold.  My first for 2018 will be Bank of South Carolina‘s announced 10% stock dividend.

Then there are the regular dividends (for this purpose I’ll ignore qualified or not).  Most DGI measure using dividend growth rate as the metric of choice. According to S&P Dow Jones Indices, “the average dividend increase during Q1 2018 was 13.9%”. This correlates with my portfolios’ average increase of 11.25% during the same period. DivGro published an article on Seeking Alpha with year-end data for his portfolio and watch list. I liked his categorization and borrowed them to illustrate my Q1 results.

My color coding is blue being stock dividend payers and brown being foreign.

I will note that some of these companies raise dividends multiple times per year (Canadian banks).  Other points of note are the number of financials and foreign companies labeled as “Outsized Increases“.    Just another data point to add to the thought process.  Interesting?  I think so.  Meaningful?  Who knows?

6 thoughts on “Tax Time & Earnings Season

  1. Hey SR, Just read an article in todays WSJ “Firms poised to jack up dividends”. I’m all for that, but they say “the quickest growth in payouts is expected to come from companies that historically haven’t been consistent dividend payers”. If that’s the case, those types of companies are not who I (you?) hold. Thoughts? Tom

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  2. Now that’s one article I missed. I will assume the reference is to the FANGs in particular – which I don’t invest in primarily due to a heavy early reliance on (what I thought were) non-sustainable models – AMZN on sales tax avoidance, NFLX on net neutrality. So you could say I missed that one. My sense is that GOOG and FB are best positioned to be in this camp. Of the ones I own, I would rate PYPL a possible along with some other spinoffs I hold. O&G is making a comeback but after being burned a few years back I’ll invest with their lenders (BMO & USB being two). Other potentials in my portfolio still appear to have debt covenants restricting payouts which would require waivers (which is why I consider them speculative). There’s probably something I’m missing but I’ll stick with what’s been proven to work. 🙂


  3. Well, the tax man is going to get you one way or another the key is to minimize the hit. Tactics like reciprocal tax treaties or in your case leveraged ETFs. The ones you hold still pay a dividend, albeit a minimal one, as the focus is on index appreciation rather than dividends. I get a foreign tax hit of 0 – 17.5% depending on country and type of account – most of which was credited on my US tax return (not sure what next year’s tax plan will bring yet).


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