AboutJay Kay Expertise As a private investor for the past 40 years, I have experienced both bull and bear markets, and have lived to tell the tale. I should be able to provide you with serious, practical insights into managing stocks, bonds and mutual funds in your portfolio, along with useful information concerning most aspects of personal finance. No specific stock/bond recommendations furnished.
Expert: Jay Kay Date: 9/9/2005 Subject: tax break on dividends
Question Hello,
Thank you first of all for taking my question.
I've been considering buying a Vanguard mutual fund which invests in dividend paying stocks. This investment will be for the long term (10 years or more) and I like the idea of receiving income through dividends while waiting for capital appreciation.
One of the main reasons for my interest in purchasing the dividend –income mutual fund is because of the somewhat recent tax break on dividends. However, I understand that there is a “sunset” on this tax break on dividends and that it will expire in year 2008.
My question is this: what are the chances of this sunset provision being extended or the tax break becoming permanent? Can one know for sure or take an educated guess?
Answer I don't think it's possible at this point in time to make a truly "educated" guess, as there are too many variables - beginning with the state of the economy, and ending with 2008 being a presidential election year. There is no question in my mind that your guess is every bit as good as mine. Possibly because the tax legislation regarding dividends was viewed as correcting a long-standing inequity, I might be inclined to expect its provisions to continue - but that is nothing but my guess (which, again, is no better than yours). Although your investment in the Vanguard fund is intended to be truly long-term, should the tax law on dividends be altered, you can always sell your shares of the fund (probably without having to bear much of a financial penalty - although that, too, is a guess).
In contemplating the purchase, keep in mind that not all dividend payments benefit from the tax cap. What percentage of the dividends in this Vanguard fund do benefit is something Vanguard can (and will) tell you.
And finally - even though you didn't ask - your reference to "waiting for capital appreciation" is somewhat puzzling to me because most investments designed to produce significant dividends (e.g., in utilities) are made in the expectation of generating significant current income, with capital appreciation distinctly secondary. In other words, those investing for capital appreciation are not likely to select a bond fund as an appropriate vehicle. If, on the other hand, you meant capital appreciation in the price of the fund shares, you may once again be looking at a less-than-promising type of choice.
This is more than you asked for, but I felt it was relevant, given the information you provided.
