Twenty-six-year-olds and their grandfathers may not share the same investment philosophies, but there are a few ideas that transcend generations, according to the results of a recent survey published by Eaton Vance.
For one thing, everyone likes a dividend. For another, no one likes taxes. As a result, most hope Congress will extend or make permanent the 15% dividend tax rates set to expire in 2010, and then to stretch out the time workers are allowed to accumulate savings in other tax-sheltered retirement accounts by repealing the mandatory withdrawal age.
"There is overwhelming investor support for the reduced tax rates on dividends, suggesting that if Congress makes these tax rates permanent, they would be reinforcing desirable behaviors by both investors and corporations," said Duncan W. Richardson, executive vice president and chief equity officer at the Boston-based firm.
Investors appear to have high confidence in companies that pay dividends. In fact, 73% of those surveyed agreed that predictable dividends are a sign of a company's financial strength, according to the poll, prepared for Eaton Vance by Penn, Schoen & Berland Associates of Washington This, the 8th annual investors survey, included the responses of 1,209 U.S. investors over the age of 25 with at least $50,000 invested.
Investors of different generations have divergent ideas of the value of dividend-bearing investing. Thirty-eight percent of seniors, defined as those over 65, are the most likely to look to stocks for not only appreciation, but also income, while 7% said they use investments primarily for income.
On the other hand, 67% of Boomers, defined as those between 41 and 64, and 70% of GenXers, or those between 25 and 40, said they are more concerned with long-term appreciation of stocks than immediate payouts.
When it comes to dividends, GenXers are almost as likely as seniors to prefer the payments to stock buybacks, with 70% and 74%, respectively, responding as such. By comparison, Baby Boomers were the least concerned about taking dividends, with only 62% saying they prefer payments to buybacks.
That may be because Boomers, typically in their peak earning years, may have a less immediate need for cash than those who have perhaps retired from their jobs, or those who are younger and have lower incomes and added pressures of buying a home or starting a family, said Don Cassidy, executive director of the Retirement Investing Institute in Denver.
When it comes to taxes, investors of all ages said less is more, according to Eaton Vance. Seventy-nine percent of those surveyed agreed that the 15% tax rate on dividends should be either extended or made permanent. If the lowered rate were made permanent, 36% of those surveyed said they would increase their allocation to dividend payers, while 8% of those who do not already invest in this class said they would consider starting. GenXers were especially enthusiastic, with 52% saying such legal changes would increase the attention they pay to dividend-yielding products.
Tax laws continue to trip up investors. Two-thirds of those asked were unfamiliar with tax-managed funds. When investing outside of a qualified account, choosing tax-managed funds has proven over the past decade to kick up overall returns by as much as 2% each year. Sixty-three percent of GenXers said such statistics encourage them to consider the asset class, compared to only 34% of senior citizens.
Part of the confusion around taxes may center on the fact most people simply don't know how tax-efficient products should be used. In fact, only 39% knew that variable annuities are most appropriately held outside of qualified plans, 46% knew that municipal bonds were likewise already tax-efficient, and only 40% knew that tax-managed stock funds are most effective in non-tax-deferred accounts.
Fifty-five percent of those surveyed noted that their company-sponsored 401(k) is their primary vehicle for retirement savings. As employees begin retiring later, taking on post-retirement jobs, and living longer in the face of increased healthcare and the cost of living, 59% of those surveyed support the idea of Congress repealing the age limits of the tax protections these and similar accounts offer.
"Mandatory withdrawal has been disliked by most people forever," said Dallas Salisbury, president and chief executive of the Employee Benefits Research Institute in Washington.
But that doesn't mean it's likely to change any time soon, he said. "It's all an issue of how do you pay for it," Salisbury said. The government depends on the new taxable income stream. Finding ways to make up for the revenue loss will become an even greater issue in light of the Democrats' proposed "pay-go" rule, which requires a revenue source to be identified before any new expenditures are approved.
Such issues are likely to gain more attention in light of the recent Pension Protection Act, especially as the powerful Boomer constituency begins moving from accumulation to distribution of savings.
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