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TheStreet Open House

Don't Invest Based On Tax Policy Shifts

Stocks in this article: AAPLMDKO

"I love these companies, but I'm so scared that now all of the sudden I'm going to get taxed at such a rate with them that they won't be worth anything," said Moorin, according to The Times.

I wish Moorin luck with his trades, but I have to say that I cringe when I hear a comment like that.

If you love a company, the last thing you should do is sell its shares based on fears that its dividends might be taxed at a slightly higher rate. A great company that delivers a long-term track record of investment returns -- including steady dividend payouts -- over the life of your portfolio isn't going to be rendered worthless by any stretch as a result of any of the tax policy changes that are on the table.

Let's take a quick reality check: the capital gains rate, which is currently 15%, was 28% under President Ronald Reagan. Maybe if it moves up to 20% we can still have "morning in America" again.

It's true that many investors are depending on dividends for income in this low-rate environment, and a substantial tax hike on those dividends will hurt them, but where else are they going to go now? The yield-starved bond market? If they own good stocks that pay a healthy dividend now, I'd stick it out.

Yes, stocks have sold off in reaction to Obama's strong reelection victory and the threat of higher taxes that comes with it, but it has only been two weeks. If tax increases actually happen, then stocks may sell off more, but where will they be a year from now... or five or ten years from now? Stocks probably rallied at the time of the Bush tax cuts in 2003, but five years later was anybody celebrating those transitory market fluctuations as news of the global financial crisis was prompting reflections on the U.S. stock market's "Lost Decade"?

Patrick Boyle, an investment strategist with Bessemer Trust, recently published an examination of stock market reactions to tax policy changes over the last three decades, and he concluded there is "no clear link between tax changes and U.S. equity performance." One reason for this, Boyle notes, is that Americans hold about $19 trillion in tax-free or tax-deferred retirement accounts, and the occasional change in tax policy has little to no bearing on their decisions as a result.

Maybe we should be loading up on dividend stocks in our IRA accounts, and taking advantage of this sell-off. If higher taxes puts the U.S. on a more sustainable fiscal path, then that should ultimately give confidence to investors and boost the stock market.

At the time of publication the author held shares of AAPL.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


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