Dividends in the Context of Taxation Environment

169849_taxOne the benefit that dividend investors have is lower tax percentage (i.e. 15%) on qualified dividends. In case of lower tax brackets, the qualified dividends are not even subject to taxes. In 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act. One of provision in this law was to reduced the tax rates on certain dividends (known as qualified dividends) to 15% for the highest income earners. Furthermore, this provision are to expire at the end of 2010 if Congress fails to renew or modify. So far, it has not been extended.

Imagine that Berkshire had only $1, which we put in a security that doubled by year-end and was then sold.Image further that we used after-tax proceeds to repeat this process in each of the next 19 years, scoring double each time

At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government. We would have left with about $25,250. Not bad.

If, however, we made a single fantastic investment that itself doubled 20 times during the 20- years, our dollar would grow to $1,048,576.

Were we then to cash out, we would pay 34% tax of roughly $356,500 and be left with about $692,000.

— Warren Buffett in Berkshire’s 1989 annual report.

continue reading rest of the article….

Dividend Investing and Businesses with Moat

We all have read many times in investing literature about investing in companies that have wide moat. We all also know that this term was made famous by Warren Buffett. What is this wide moat? In simple terms, it is some type of competitive advantage in its business. Competitive advantage in business can come from many different types, viz., brand, high switching cost, patents/IP/rights, ease of scalability, low cost producers, etc.

There are many companies that have many years building moats around their businesses. This moat makes it difficult for competitors to encroach upon their market share. Suffice to say, business with moat have sustainable competitive advantage. In general, companies with moats in their business are very good dividend growth providers. However, the opposite may not be true. Following are few examples of companies with moat that are also dividend growers. continue reading rest of the article….

Graco Inc – Company with High Risk to Dividend Growth

Graco Inc. (GGG) and its subsidiaries, provides fluid handling systems and components. Its products are used to move, measure, control, dispense, and spray a wide range of fluids in Industrial, Contractor and Lubrication applications. The company was founded in 1926 and has headquarters in Minneapolis, Minnesota.

GGG is part of S&P Mid-Cap 400 Index and has been increasing dividends for last 10 years (including the latest one). The most recent dividend increase of 2.7% was in December 2009. In last 10 years, the annual dividends have increased from $0.13 per share to $0.80 per share.

Trend Analysis
Here I am looking at trends for past 10 years of company’s revenue and profitability. These parameters should show consistently growth trends. The trend charts are shown in images below. continue reading rest of the article….

Selling Shares of BP with Changes in its Fundamentals

100422-G-8093-004-Deepwater HorizonThe oil spill from BP’s offshore platform has been in news since last week. I do not have any first hand idea of the ground realities. Based on news media and reports, as of today, the oil spill continues unabated, with many different estimates of rate of flow of crude oil in the sea. To me, this is an indicator that nobody knows how serious or trivial this crude oil spill is. There are no signs that in will stop in near future.

The news agencies government organizations have been showing that potential short term damage and long term impacts would be very significant (to local population and local businesses). At least for now, BP has also mentioned that it will pay for clean up and considers itself partially responsible. In short, BP is on the hook for cleanup, irrespective of what are the ground realities and technicalities.

According to one estimates, it is expected that BP will be liable up to $6 billion for clean up, $ 1Billion for litigation, and $3 Billion for compensation, and $4 billion in lost revenue. This is a total of $14 billion. I am not so sure if these estimates are in the ball park. However, it gives some idea on the scope of the financial impact. continue reading rest of the article….

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