Tuesday, March 30, 2010

"Muni Bonds, Dividend Stocks, and Upcoming Tax Hikes" (DVY; MUB)

From Bespoke Investment Group:

The tax on capital gains and eligible dividends is set to rise from 15% to 20% in 2011 and also up to 23%+ for earners over $200,000 because of provisions in the new health care bill. So dividend stocks should be going down and tax exempt securities like municipal bonds should be going up, right? Over the last six months, at least, DVY (the dividend stock ETF) has risen by more than the S&P 500 tracking SPY ETF, while the national municipal bond ETF (MUB) is down 2.05%.

As 2011 approaches, it will be interesting to see how the upcoming tax hikes on capital gains and dividends will impact these ETFs. Common wisdom would say to stay away from DVY and buy tax free muni-bonds, but other factors like the direction of interest rates will likely impact these ETFs even more.

If you simply don't want to get hit with the tax increase, though, own non-dividend paying stocks and tax-free munis and don't sell them for gains.

Easy enough, right?