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November 2012 Blogs
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At this point we are confident that everyone reading this has heard the term “fiscal cliff” and has a pretty good idea what it means. The so-called fiscal cliff refers to the beginning of 2013 when the Bush-era tax cuts (from 2003) are set to expire and certain government spending and entitlement cuts are scheduled to commence. This is estimated to account for an additional $600B in revenue for Uncle Sam next year.

Now, I’ve never been over a fiscal cliff before, but it certainly sounds pretty scary. From what I do know about more traditional cliffs, there are a few things one can do to prepare:

1. Find out how long the fall will be and what’s at the bottom
2. Wear the appropriate gear, including a parachute and helmet
3. Consider the possibility that the bottom might not be the end

1. Find out how long the fall will be and what’s at the bottom

What is the worst case scenario? That our elected leaders cannot, or will not, find a palatable solution and taxes go [back] up and spending goes [back] down. It is the former (tax increases) that is getting the majority of the headlines in the investment community. In particular, the tax rate on qualified dividend income is front and center. Qualified Dividend Income (QDI) is currently taxed at a maximum of 15%, but is set to nearly triple if we “go over the cliff” to a maximum of 43.8%.

Take a look at this article from Seeking Alpha that does an excellent job explaining the topic.

2. Wear the appropriate gear, including a parachute and helmet

In this case, our parachute is going to be the tax shelter of a tax-deferred investment account (IRA, 401k, Pension, etc.). Many of our clients’ assets are held within such accounts. You aren’t hearing much about this – it’s not as scary – but  there will be no impact on the taxation of dividends or capital gains within your retirement account. Zero.

We like companies that focus on returning a large portion of their cash flow to shareholders — Master Limited Partnerships and REITs are good examples.

3. Consider the possibility that the bottom might not be the end

Let’s say we don’t go over the fiscal cliff, or that we do but it isn’t nearly as steep as we are anticipating. Let’s say there is a reasonable compromise in Washington – insert hilarious anti-Government joke here – and tax rates move a little higher than they’ve been for the last ten years (but well below where they were in the 1970s). What then? Might people grumble for a few weeks and then go about their business?

Dividend-paying securities such as utility and telecom stocks have already been selling off in advance of the looming cliff, forcing their yields higher (when prices go down, the relative dividend rate or “yield” goes up). This presents an opportunity.

As always, your comments are welcome below. If we haven’t had a chance to review your portfolio or address your specific concerns regarding the fiscal cliff or any other issue, please contact us as soon as possible.

Have a great day!

Adam B. Scott
Argyle Capital Partners, LLC
www.argylecapitalpartners.com
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
310.772.2201 (Main)
310.496.2822 (Fax)

 

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