The Bush tax cuts were a hot topic these last few weeks between the deal making (extending cuts for all in return and estate tax relief for extended unemployment benefits) and the political dancing, but ultimately something had to be done. While much has been made of the tax brackets themselves, one of the other things that went along with it was the long term capital gains tax rate. They were set to increase from 0% and 15% to 10% and 20%, respectively.

So here’s the question at hand, what if we no longer had favorable long term capital gains rates (and dividend tax rates) and instead all investment gains were taxed as ordinary income? In other words, what if there was no such thing as long term capital gains? What if everything were taxed as short term?

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A dividend aristocrat is a stock that has increased its annual regular dividend every year for twenty five years. A dividend champion is a stock that has paid out its dividend every year for twenty five years, not necessarily increasing it each year. The idea behind both lists is that a lot has happened in the last 25 years and if a company has kept its dividend obligation, chances are it will continue to do so (but no guarantees!). Aristocrats are kept to a higher standard, the company must increase its dividend each year to stay on the list.

What if you want to find an “almost” dividend champion or aristocrat? That’s when you have to look at Mergent’s list of Dividend Achievers (Indxis is a subsidiary of Mergent). Dividend Achievers are companies that have paid out a dividend for ten years or more (and include aristocrats and champions) and unlike the other two lists, achievers aren’t pulled entirely out of the S&P.

The current list of Dividend Achievers has 212 companies spread out across a variety of industries. Some familiar names, from the other lists, includes 3M, Abbott Labs, AFLAC and Wal-Mart. These types of lists are fun because they give you a good starting point if you want to find a few good dividend stocks (I own shares of Abbott Labs and AFLAC, but not 3M or Wal-Mart), but don’t stop your research there because history isn’t a good indicator of the future (plenty of banks fell off the aristocrat list these last two years).

I was reading USA Today a couple weeks ago when I saw John Waggoner’s column about the Dogs of the Dow investing strategy. It’s a pretty easy strategy and one that I find really appealing. All you do is buy equal amounts of the ten highest dividend yielding components of the Dow each year and swap them out each year.

The strategy relies on the idea that each of the thirty components of the Dow is a stable company that will be here for decades to come. The ones with the highest yields are simply the companies that have had their share price beaten down by Mr. Market. By buying into the companies with the highest yields, you’re assuming you’re buying good companies at a discount and that they will eventually revert to the mean.

One problem… and Waggoner, to his credit, states it right off the bat, there are problems with “formulaic investing,” or what I consider gimmicky investing, and the fact that the Dogs of the Dow have performed terribly until this year is an example of that. (I don’t like the term formulaic because isn’t all analysis in some way formulaic?)
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The recent economic apocalypse (it’s been going on for long I’m running out of ways to say it without repeating myself!) has a lot of people re-evaluating how much they want to keep invested in the stock market. Between the dot com bubble in 2001 and the financial implosion these last few years, people just don’t trust the stock market anymore.

The reality is that you don’t need to invest in the stock market, especially if you have a short or no time horizon. There are a lot of other options outside of the equity market if you look for them. You can invest in a variety of bonds (though some say the bond market is overpriced because of a flight to safety) like Treasury and municipal tax-free bonds, hard assets like gold and silver (again, some would say they’re overpriced), real estate, and others.

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Right now, the best savings account rates aren’t even 2% APY. They’re so low that even those people who are earning nothing, 0%, have very little incentive to move their money! If Bank of America is paying you 0.10% in your savings account, and an online bank is offering 1.50%, do you know how much more money you’d earn if you moved $1,000 over? You wouldn’t even make fifteen bucks more. That’s it. How much is your time worth? Certainly more than $15!

The Federal Reserve is making it hard for savers to save because they’re keeping the target interest rate so low. Why would a bank pay you 1% when they can get it for less than 0.25% from the Fed? It’s a miracle the rate is as high as 1.50%! The problem with trying to find a safe alternative is that in order to get the rewards, you have to take some risks. Savings accounts have zero principal risk because they are FDIC insured, the only risk you face is inflation risk (you earn 1% but inflation goes up 3%, you’ve essentially lost purchasing power) and everyone deals with that.

So what are some “relatively” safe alternatives?
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Market timing works.

The basic idea behind market timing is that you want to pick your spots, buy low and sell high. There are software programs that will automatically trade for you and there are firms, like Tradebot, who have not had a single losing day in four years. Tradebot typically holds a stock for 11 seconds and hasn’t lost a penny on a single day in four years. Four years.

Don’t give me the usual crap about market timing not working. It works.

The problem is that it won’t work for you because you don’t have a big pile of money to trade with, you don’t have nearly as much knowledge, and you don’t have a magic money machine software package. Without all three of those pieces, market timing doesn’t work and you should follow fish like me to the index fund promised land.

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When people talk about the Bush-era tax cuts, they’re usually referring to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) signed by President Bush in June of 2001. Many of the provisions were set to phase in over 9 years but those were accelerated when the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was signed just two years later. Many of those cuts are set to expire this year, the two big items being income tax rates and capital gains rates.

President Obama has publicly said that he will let the Bush-era capital gains tax cuts expire on schedule this year, so it’s important to know how they will affect your investments.
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You’ve probably heard that your most valuable asset is time. For new graduates, that line actually refers to two different ideas, both of which are critically important to understand. The first idea is that with few entanglements and draws on your time (mainly no kids), you can devote more of it to your career and engineer the largest advancements in your career.

The second refers to the power of compounding interest and that’s important to understand with regards to your retirement in forty+ years.
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