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Answer:
Dear
Tom,
First
of all, I just want to emphasize that, taxes aside,
Dividend Reinvestment Plans (DRIPs) are a great way
to painlessly increase your portfolio. By having your
dividends automatically reinvested in additional shares
of the company's stock, you avoid temptation -- the
temptation to spend your dividend checks at the mall.
Most
companies require you to own at least one share of
stock before they'll let you set up a DRIP. You can
choose to open an account here at BUYandHOLD. We charge
just $6.99 a month for two trades plus $2 for each
additional trade. If you want to make unlimited trades,
it's $14.99 per month. As part of the BUYandHOLD service,
you can choose to reinvest your dividends automatically
when you purchase a stock.
With
a few cases, you can buy shares directly from the
company for a fee. BUYandHOLD's former B&H 101
writer, Chuck Carlson is editor of a newsletter I
think you would find very helpful in selecting appropriate
stocks --"DRIP Investor."
Recently,
due to the weakened economy, it's taken longer than
in the past to build up a large portfolio based on
DRIPS simply because companies have not been paying
very impressive dividends. In fact, as we go to press,
the yield on the Standard & Poor's 500 Stock Index
is below 2%.
The
New Tax Law
Two
weeks ago in this column, we reviewed the nitty-gritty
of the tax cut as it pertains to investors. I urge
you to review that material by clicking HERE.
The
key point to keep in mind is that tax rates on both
dividends and capital gains drop to a maximum of just
15% for most taxpayers. However, if you're in the
bottom two tax brackets (10% and 15%), you'll pay
just 5%. This new law means investors will now have
more money to save or invest.
Note:
Before the new tax cut, dividends were taxed at
your ordinary income rate, which could have been as
high as 38.6%.
Another
advantage of dividend-paying stocks: They provide
a cushion against losses when the market heads south.
More
Companies On Board
I
think it's quite likely that more companies will set
up DRIPs or at the very least, will start to pay dividends,
simply because of the new tax break. Some may also
increase their current dividend in order to attract
investors and ultimately boost share prices. You may
recall that earlier this year, Microsoft announced
it would pay a dividend -- the first in the company's
history. The amount: 16 cents per share. Some speculate
that Microsoft made this move in anticipation of the
greater appeal dividends would have with the lowered
tax rate.
To
find out how much a stock is yielding, go to our Research
Stocks section.
Good
luck!
BUYandHOLD
does not recommend any securities. The security mentioned
above is being used for illustrative purposes only
and should not be regarded as an offer to sell or
as a solicitation of an offer to buy.
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