Last month, I dedicated this one-pager to the looming dividend tax. What actually hit us at budget time last month was a tax rate 50% higher than what had originally been expected, 15% instead of the expected 10%. Why then is it that the new dividend withholding tax, introduced at 15% in replacement of STC at 10%, is budgeted, by Treasury, to lose R1,9 billion in revenue?

Well, the answer lies in the analysis of who will be paying this tax. In the case of STC, the tax was borne by all shareholders of a company. In the case of the new dividends tax, some massive blocks of shareholders are exempt from the tax. If your shareholdings are indirectly held by one or more of;

  • a Preservation Fund,
  • a Retirement Annuity,
  • a Living Annuity or
  • an employer-sponsored Retirement Fund,

then, all things being equal, the dividends received within those investments will actually go up! The reason for this is that the previous STC applied to all dividends regardless of the nature of the shareholder. Dividends Tax on the other hand is a tax on the shareholder. This means that because the entities listed above are generally exempt from all other taxes, it follows that they will, similarly, be exempt from Dividends Tax. So, if you are invested via one of those vehicles, your investment returns should improve by reason of an increase in dividend yield.

The second source of revenue lost to the fiscus relates to the reason that the new dividend tax was implemented in the first place, that is foreign shareholders are also exempt from the tax or can claim it back if it is withheld. Of course the theory is that replacing STC with dividend withholding tax will encourage inward foreign investors to SA, so one should expect this increased demand for listed shares to ultimately be reflected in the share price, once again benefitting investment returns.

Market timing

Many readers will recall the examples, in Sasfin’s standard strategy documents, showing that market timing cannot be relied upon to generate returns, and that lifestyle-based asset allocation is the biggest driver of returns. This long-held philosophy of ours has once again been highlighted in an article by Brett Arends, a financial Journalist writing, amongst other publications, for the Wall Street Journal.

In a recent article this time published in titled “Main Street's $100 Billion Stock-Market Blunder” and sub-texted “The market may be back to pre-crisis levels, but many regular investors have missed out”, Arends makes the point that Main street (the man-in–the- street) has lost an opportunity by bailing out of the market during the 2008 crisis.

 He makes the point that at 28 February 2012,

“The Dow Jones index has recovered most of the ground lost from the peak. When you include dividends, someone who invested on the day before Lehman collapsed is now up a remarkable 18%. If they invested at the lows three years ago, they have doubled their money.
But for all the cheering on Wall Street, there's a sorry tale behind the headlines.

While we've seen a stock-market boom that has made plenty of people rich, much of Main Street America has missed out. Instead of buying, they've been selling. The few moments when they've steeled themselves and turned buyers have been, on the whole, the worst times to do so.”

He continues by calculating an arithmetic consequence of this client activity:

“In October 2008, after Lehman, investors panicked and withdrew about $45 billion from their U.S. stock funds. That trade alone has cost them $25 billion in investment profits since, according to MSCI data: On average, the shares they sold for $45 billion would be worth about $70 billion (including dividends) now. In February and March of 2009, as the market slumped to its record lows, mutual fund investors sold another $29 billion worth of U.S. stock funds. That cost them another $26 billion in lost profits.

In total, by my math Main Street investors have missed out on a staggering $106 billion in investment profits over the past five years by selling stocks at the wrong time.”

As I always say, if your circumstances have changed, contact me to reevaluate your risk benefits and overall investment strategy.

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