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Higher dividend payout ratio could help propel market further

A board on the floor of the NYSE shows last week´s first all-time high set by the Dow. It has continued to climb.
RICHARD DREW / Associated Press

POSTED: Tuesday, March 12, 2013

The Dow Jones industrial average reached a new high last week, 14,397.07, and closed even higher Monday at 14,447.29.

What could propel it further?

Binney Wietlisbach, president of Haverford Trust Co., which manages nearly $7 billion of assets for individuals and institutions, wishes the dividend payout ratio would improve, from 32 percent to closer to the 50-year average of 49.4 percent.

Companies with stocks paying out higher dividends could attract even more investors, Wietlisbach says. (The dividend payout ratio is defined as the yearly dividend divided by earnings, and can be an indicator of financial health.)

“I foresee a new trend, with companies like Apple paying out a higher portion of its $137 billion in cash, just as an example,” she says. “Their dividend payout ratio could easily double, and they could cover it.”

Wietlisbach says her firm is avoiding junk bonds, which are “very expensive,” and has been out of Treasuries for some time, instead preferring municipal bonds for clients. 

New Treasury options. Are you fearful your Treasury notes and bonds might fall in price? Investors who want to hedge, or buy insurance against, price risk in Treasury bonds can now use puts and calls on Treasuries the same way they are used for stocks.

Trading in options on underlying U.S. Treasuries launched last month on the NASDAQ OMX PHLX exchange on Market Street, and may help retirees seeking additional income or investors looking to lock in gains on Treasuries they already hold, or those holding large single Treasury positions.

For more information, go to the Options Industry Council’s website (www.optionseducation.org) or the Nasdaq OMX trader site (http://bit.ly/W8DKQl).

IRA tax traps to avoid. Americans hold a combined $5.2 trillion in assets in individual retirement accounts. These IRAs provide tax benefits, but can also present tax traps. If you run afoul of IRS rules, even by accident, penalties can be severe.

Rande Spiegelman, vice president of financial planning at Charles Schwab & Co., highlights common mistakes:

Contributing too much. If you contribute more than the law allows in any year, the IRS will penalize you 6 percent of the excess amount for each year in which you fail to take corrective action. For tax year 2013, the contribution limits for both 401(k) and IRAs have increased $500, to $17,500 and $5,500, respectively. For investors 50 years or older, the contribution limit increases for both 401(k) and IRAs to $23,000 and $6,500.

Prohibited investments. Self-directed IRA investors should be aware that prohibited investments include collectibles such as artwork, antiques, metals, gems, stamps, and coins. You can, however, invest in hedge funds and exchange-traded funds. “Check and see if the ETFs use debt or leverage, and if there’s a pass-through type of entity. Ask your broker or CPA before investing,” Spiegelman warns.

Restricted rollovers. You can transfer your IRA funds from one firm to another once every 12-month period. It’s when you take receipt of the money that you face a number of restrictions. You have 60 days to redeposit it into the same or another IRA before it counts as a taxable distribution, plus a penalty if you’re under 59½.

Premature withdrawals. If you take an unqualified withdrawal from your IRA before age 59½, you incur a 10 percent federal early-withdrawal penalty, plus ordinary income tax on any of the amount considered deductible contributions or earnings. And even if you avoid the federal penalty by taking a qualified distribution, you’ll still pay income tax. “Exhaust all other options,” Spiegelman says.

Missing your RMDs. If you’re 70½ or older or if you’ve inherited an IRA from someone other than your spouse, you must take required minimum distributions from the IRA each year. Original owners of Roth IRAs are exempt from RMD rules. The penalty for failing to take your RMD is a 50 percent excise tax on the required distribution amount, plus applicable ordinary income tax. Ouch!

 


Erin Arvedlund is a finance reporter in Philadelphia. Contact her at 646-797-0759 or erinarvedlund@yahoo.com.

 

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