Ken Himmler.com

It wasn't so long ago that many investors regarded dividends as roughly the financial equivalent of a record turntable at a gathering of MP3 users–a throwback to an earlier era, irrelevant to the real action. But fast-forward a few years, and things look a little different. Since 2003, when the top federal income tax rate on qualified dividends was reduced to 15% from a maximum of 38.6%, dividends have acquired renewed respect. Favorable tax treatment isn't the only reason, either; the ability of dividends to provide income and potentially help mitigate market volatility is also attractive to investors. As baby boomers approach retirement and begin to focus on income-producing investments, the long-term demand for high-quality, reliable dividends is likely to increase.

Why consider dividends?

Dividend income has represented roughly one-third of the monthly total return on the Standard and Poor's 500 since 1926. According to S&P, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s–in other words, more than half that decade's return resulted from dividends–to a low of 14% during the 1990s, when investors tended to focus on growth. If dividends are reinvested, their impact over time becomes even more dramatic. S&P calculates that $1 invested in the Standard and Poor's 500 in December 1929 would have grown to $57 over the following 75 years. However, when coupled with reinvested dividends, that same $1 investment would have resulted in $1,353. (Bear in mind that past performance is no guarantee of future results, and taxes were not factored into the calculations.) If a stock's price rises 8% a year, even a 2.5% dividend yield can push its total return into the double- digit range.

Dividends can be especially attractive if the market is producing relatively low or mediocre returns; in some cases, dividends could help turn a negative return positive. Dividends also can help mitigate the impact of a volatile market by helping to even out a portfolio's return. Another argument has been made for paying attention to dividends as a reliable indicator of a company's financial health. Investors have become more conscious in recent years of the value of dependable data as a basis for investment decisions, and dividend payments aren't easily restated or massaged. Finally, many dividend-paying stocks represent large, established companies that may have significant resources to weather an economic downturn–which could be helpful if you're relying on those dividends to help pay living expenses. The corporate incentive Financial and utility companies have been traditional mainstays for investors interested in dividends, but other sectors of the market also have begun to offer them. For example, investors have been stepping up pressure on cash-rich technology companies to distribute at least some of their profits as dividends rather than reinvesting all of that money to fuel growth. Some investors believe that pressure to maintain or increase dividends imposes a certain fiscal discipline on companies that might otherwise be tempted to use the cash to make ill-considered acquisitions (though there are certainly no guarantees that a company won't do so anyway).

However, according to S&P, corporations are beginning to favor stock buybacks rather than dividend increases as a way to reward shareholders. If it continues, that trend could make ever-increasing dividends more elusive. Dividends paid on common stock are by no means guaranteed; a company's board of directors can decide to reduce or even eliminate them. However, a steady and increasing dividend is generally regarded as one sign of a company's ongoing health and stability. For that reason, most corporate boards are reluctant to send negative signals by cutting dividends. That isn't an issue for holders of preferred stocks, which offer a fixed rate of return paid out as dividends. However, there's a tradeoff for that greater certainty; preferred shareholders do not participate in any company growth as fully as common shareholders do. If the company does well and increases its dividend, preferred stockholders still receive the same payments.

The term "preferred" refers to several ways in which preferred stocks have favored status. First, dividends on preferred stock are paid before the common stockholders can be paid a dividend. Most preferred stockholders do not have voting rights in the company, but their claims on the company's assets will be satisfied before those of common stockholders if the company experiences financial difficulties. Also, preferred shares usually pay a higher rate of income than common shares. Because of their fixed dividends, preferred stocks behave somewhat similarly to bonds; for example, their market value can be affected by changing interest rates. And almost all preferred stocks have a provision that allows the company to call in its preferred shares at a set time or at a predetermined future date, much as it might a callable bond.

Look before you leap

Investing in dividend-paying stocks isn't as simple as just picking the highest yield. If you're investing for income, consider whether the company's cash flow can sustain its dividend. Also, some companies choose to use corporate profits to buy back company shares. That may increase the value of existing shares, but it sometimes takes the place of instituting or raising dividends. If you're interested in a dividend-focused investing style, look for terms such as "equity income," "dividend income," or "growth and income." Also, some exchange-traded funds (ETFs) track an index comprised of dividend-paying stocks, or that is based on dividend yield. Be sure to check the prospectus for information about expenses, fees and potential risks, and consider them carefully before you invest. Taxes and dividends Some dividends, such as those paid by real estate investment trusts (REITs) and master limited partnerships, don't qualify for the 15% maximum tax rate, and a portion may be taxed as ordinary income. Also, the 15% maximum rate is scheduled to expire at the end of 2010, and there is no guarantee dividends will continue to receive favorable tax treatment.

The 15% rate applies to qualified dividends–those that come from a U.S. or qualified foreign corporation, one that you have held for more than 60 days during a 121-day period (60 days before and 61 days after the stock's ex-dividend date). Form 1099-DIV, which reports your annual dividend and interest income for tax accounting purposes, will indicate whether a dividend is qualified or not. Be aware that some so-called dividends actually are considered interest for tax purposes. These include dividends from deposits or share accounts at cooperative banks, credit unions, U.S. savings and loan or building and loan associations, federal savings and loan associations, and mutual savings banks.

In the ancient past, people all over the world used to seek religious freedom from tyranny and oppression.  They employed numerous methods to attain their spiritual independence and achieve a state that we often call ‘Enlightenment.’  The situation is very much the same for investors today as they struggle to climb the investment ladder and attain their own financial independence. 

Investment strategies are a lot like the various religious paths of days gone by in that all of them are undoubtedly similar while employing different methods to achieve the desired effect.  Every investment strategy requires dedication and a degree of faith, which comes in the form of confidence in your own financial decisions.  Investors are like spiritual brothers and sisters who share advice with each other while walking parallel paths to the much-desired financial independence that everyone seeks.

While there is a degree of competition that exists on the stock market, investing for retirement is not a solitary path that you have to travel by yourself.  There are numerous opportunities that you can take to achieve your goal and have a comfortable retirement.  There are online internet communities that offer free investment advice, there are financial planners and financial advisors that can act as teachers and show you the way.  The investment journey of a lifetime begins with the first step, and the most important step is always the next.

As with any devotion, be it religious or secular, investing is a journey that is never truly over.  There is always a new plateau to reach.  One can never truly be at the top of the investment mountain.  There can be much satisfaction to be had when looking at all that you have accomplished and looking at what you can still accomplish in the future.  Your investment journey is never complete.
 

If you are of retirement age, you are no doubt concerned about the stability of your social security benefits.  For a lot of people, their investments only provide a portion of their income and they have to rely on Social Security to help pay their bills.  Kelly Greene of the Wall Street Journal  written an article about how she thinks the present economy is going to affect Social Security in the next few years.

According to the Congressional Budget Office, Social Security benefits are not likely to increase for the year 2010.  This announcement has caused many retirees to worry about their personal financial security for the oncoming years.  Many are wondering if the state of the economy could cause retirees to lose some of their precious benefits that they rely on to pay their bills.

Worried retirees can rest easy tonight, because Ms. Greene cited a statement by Mark Lassiter, a Social Security spokesman in Baltimore, who states that even if there is economic deflation, Social Security benefits will not be cut for the year 2010.  This is good news.

On the other hand, this is a prime example of why investing for retirement is so necessary for the future.  In the best-case scenario, a retiree is able to spend their golden years living off of their retirement savings and investments without having to fuss with the worries that accompany Social Security.  It is ever so important, especially in this era of economic instability, that people take control of their financial lives and make wise investments for the future.  Do some research, become familiar with the common investment terms used in the markets. 

I have said it before, it is YOUR money.  Let it work for you and you will be free of the worries that plague so many today. 

It is a common belief amongst investors that the only real investment strategy is to have a lot of money already saved up in order to make a lot of money for your retirement savings.  This is a true sentiment in that the more money you have, the more you will make.  It should never be thought however that just because you do not have a large sum of money for investments right away that you should avoid investing at all.  If such is your thought process, you will never understand the true principles behind generating real, perpetual wealth.

Money is a curious thing.  If invested in the right way, even a very small amount of your money will work for you by generating more money.  This idea is not new, but the secret behind the best investment strategy has a tendency to escape many people.  Imagine every single penny as a little employee that can hire new little pennies to work for you.  Even a small number of these little pennies will get you more pennies.  And these new pennies that are added to your investment will also work to get new pennies.  In this retirement strategy a small little bit can ultimately have a very large turnover over time.  If you get started making investments early, imagine how much you can profit from this investment strategy by the time you reach retirement age.

Now imagine what would happen if every time you got a new paycheck you added a little bit of your newly acquired money to your steadily growing investment.  You will be employing even more pennies to help build your retirement savings for you while you concentrate on other things.  This is a perpetual cycle that will continue making you money as long as you continue adhering to this amazing investment strategy.  In this way you will be soon be able to turn a your small amount of money into the right amount for you.  So do not wait until you have a fortune to invest.  Remember, investing now will ensure that you have a fortune in the future.
 

Planning for retirement at any stage in life can be intimidating.  There is so much information about the subject, and many people have different opinions on which way you should go.  It can be very difficult to find safe investments and reliable investment advice.  The first thing you should remember every step along the way is that it is your money.  You have the final say as to where it should go.  Ultimately the person responsible for your finances in the end is you.

It is important to realize that nothing in the financial world is absolute.  There is always room for error and there is no such thing as a guarantee.  With this thought in mind, it is also important to know that in general terms higher risk investments are also investments that can potentially earn you the most.  The downside is that they can also lose as much as they earn.  One wrong move can sometimes destroy years of hard work.  Nobody wants that to happen.  For this reason it is always important that you never invest everything into one category of investments.  Putting all your eggs into one basket can place you into the path of disaster faster than anything else in your investment career.

When trying to decide what investments are right for you, it always pays to do your homework.  In the world of finance, the more knowledge you have the more power you have.  Despite what anybody will tell you, nobody can ever tell you for sure how the market is going to turn out at the end of the day.  Nobody has all the answers.  That does not mean, however, that all hope is lost.  Doing your own investment research can equip you with the tools you need to be successful in your financial planning, and allow your retirement to be as carefree as can be.
 

Even if you fully intend to carry a bond through to maturity, the issuer of the bond may have other plans. If interest rates fall heavily and the issuer of your investment bond opts to lower its interest rate expenditures then they may exercise their right to redeem or call in their bonds even before they mature.

If you own a bond that is “callable” then there is some risk of this happening if interest rates drop to attractive levels for the issuer. Should this occur, the issuer will only be required to pay you par value for the bond and this will result in you receiving less than the current market price.

One of the unfortunate aspects of having a bond called is that the market environment that motivates issuers to redeem a bond is the same that often leads to higher bond prices. So not only do you lose the potential of a pre-maturity profit by selling the bond, you’re forced to sell earlier and for less money than you want.

While many callable bonds will have call protection where the bonds can’t be called for a certain period of time, you won’t have any choice but to take par value when and if they do opt to call it in.

It needs to be said that even if interest rates fall, this doesn’t mean your bonds are automatically going to be called in. The issuer will have to see that it can lower its costs by redeeming the bonds at par value and then selling additional bonds with lower yields. Typically, interest rates would have to drop significantly for this to happen.

Because callable bonds carry the risk that you won’t get the return you anticipate, they typically pay a higher rate of interest than non-callable bonds. When considering bond investments, you’ll want to weigh the pros and cons of higher interest/higher risk or lower interest/lower risk depending on your investment goals.

Each time one taxpayer transfers wealth to another, the transfer is potentially subject to federal transfer tax, in the form of gift or estate tax. The federal transfer tax system is designed to impose a tax on each and every generation (e.g., father to son, son to grandson, etc.).

The transfer tax system accounts for the fact that a transfer might “skip” a generation by passing from parent to grandchild, for example. This is accomplished by imposing an additional tax whenever transfers of wealth are made to persons who are more than one generation below the taxpayer (e.g., father to grandson). This additional tax is called the generation-skipping transfer tax (GSTT). GSTT is imposed at the highest estate tax rate in effect at the time of the transfer (45% in 2008).

Additionally, most of the individual states impose their own transfer taxes. Together, these taxes can take an enormous bite whenever wealth is being handed down, and eventually eat away a family’s fortune. This can be troublesome to individuals with substantial wealth who would prefer to have their legacies benefit their own family members. It’s from these circumstances that the dynasty trust evolved.

A dynasty trust is created to provide for future generations while minimizing overall transfer tax. With a dynasty trust, a taxpayer transfers assets to the trust. This transfer, from the taxpayer (the grantor) to the trust, is potentially subject to transfer tax (although the taxpayer may use his or her exemption amounts to shield the transfer from tax). The trust then provides for future generations for as long as it exists. Although the trust assets effectively move from generation to generation, there are no corresponding transfer tax consequences.

For more information on dynasty trusts and other trusts such as family foundation, you can go to http://kenhimmler.com.

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What is it?

For the most part, annuities will impose various administrative charges and fees. At first, the expense may seem minimal. However, over time, the cumulative effect of the charges and fees can be substantial. These expenses typically arise when dealing with variable annuities. However, fixed annuity contracts may also assess fees in the form of surrender charges.

For more information on fees on variable and fixed annuities such as a guaranteed annuity or equity indexed annuity, you can go to http://kenhimmler.com

Fixed annuities

Fixed annuities usually do not impose express charges and fees (except for surrender charges). Because there are fewer fees involved with fixed annuities, it may seem that it is the cheaper alternative to the variable annuity. However, this may not always be the case, because a fixed annuity will usually contain implicit charges that are reflected in the interest rates in the underlying contract. These implicit charges arise when the insurance company sets the interest rate that it promises to pay at a lower rate than the rate it expects to earn on its investments (sometimes, the difference is called the spread). This spread allows the insurance company to make sure that it will recover its administrative costs.

Variable annuities

Annual maintenance charge

The annual maintenance charges for variable annuities may typically range from $0 to $100. These charges are usually deducted from the various investment accounts in which the annuity holder has placed his or her funds.

Example(s): Mr. Smith purchases a variable annuity from ABC Insurance Company. Mr. Smith has placed 20 percent of his funds in a money market fund and 80 percent of his funds in a growth fund. ABC has an annual maintenance charge of $50. Mr. Smith’s money market fund will be charged 20 percent or $10. Mr. Smith’s growth fund will be charged 80 percent, or $40.

Tip: Some contracts will waive this charge when the annuity’s value exceeds a certain amount (e.g., $25,000).

Investment management fees

Investment management fees pay for an investment management group that advises the insurance company on which investments to buy and sell. Investment management fees for variable annuities may range from .25 percent to .75 percent. While a variable annuity account can be charged a flat percentage rate, some variable annuity contracts will call for each type of fund to incur a different percentage cost.

Example(s): Mr. Smith purchases a variable annuity from ABC Insurance Company. Mr. Smith’s funds are within a money market fund and a growth fund. ABC charges an investment management fee of .35 percent for the money market fund and .60 percent for the growth fund.

Mortality and expense risk charge (M & E charge)

The mortality and expense risk charge (M & E charge) is imposed by insurance companies to protect against risk associated with the annuity contract (e.g., an annuitized contract paying out income longer than mortality tables projected the life expectancy of the annuitant). Generally, the M & E charge ranges between 1 percent and 1.5 percent of the value of the variable annuity account. The M & E charge is deducted proportionately from the variable accounts, similar to the annual maintenance charge (discussed previously).

Transfer fee

Some variable annuities will charge a fee for the transfer of funds between investment accounts. These charges can range anywhere between $0 and $15 per transfer. Some annuity contracts will allow a certain number of transfers per year without charge, assessing a charge for any transfers over the permitted number.

Surrender charge

Most annuity contracts will assess a charge for partial and full surrenders from the contract during a certain time period after the annuity is purchased (usually 5 to 10 years). This charge is often referred to as the surrender charge and can have a wide range that decreases over time. Depending on the annuity contract, the surrender charge percentage will be applied either to the full amount surrendered or the portion of the withdrawal that exceeds the earnings of the contract. Some annuity contracts allow some withdrawals without a surrender charge (e.g., 10 percent of the contract value or the contract earnings). The surrender charge is intended to prevent annuity owners from moving funds in and out of the annuity and allows the insurance company to recoup its losses if the contract does not remain in force for a lengthy time period.

Tip: Some annuity contracts will provide that there will be no surrender charge if the annuity holder dies or becomes disabled.

Tip: Keep in mind that if you surrender your annuity when you are under the age of 59�, you may also be subject to the 10 percent penalty tax that applies to premature withdrawals.

Miscellaneous fees

Variable annuities might also levy charges for administrative expenses, such as record maintenance, accounting, and reporting. In addition, a variable annuity may charge extra for certain guarantees to be written into the annuity contract. Finally, several states levy a state premium tax on annuity premiums. The tax is generally a percentage of the gross premium paid and it is generally deducted prior to the computation of sales charges. Some insurance companies choose to add the cost of the tax into the price of the premium, rather than levy a direct tax.