From the September 2010 issue of Investment Advisor • Subscribe!

Asset Allocation

Behind the Numbers with Sam Stovall

Behind the Numbers with Sam Stovall

As part of former President George W. Bush's tax-cutting packages passed in 2001 and 2003, the tax rate on dividends and long-term capital gains were capped at 15%, making dividend-paying stocks an attractive option for investors who were seeking income while willing to take on the risk associated with stocks. Before the cuts, dividends were taxed at the taxpayer's marginal rate, which could be as high as 39.6%, while the capital-gains tax rate for assets held more than 12 months was 20%, and 18% for qualified five-year capital gains.

Sam Stovall, S&P's chief investment strategist, suggests investors seeking income should focus on stocks with an average-to-high S&P Quality Ranking (QR), which ranks the growth and stability of earnings and dividends, and shares that also have a high S&P STARS rankings. Under S&P ERS' proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to future total return potential versus the expected total return of a relevant benchmark. A stock that carries a five-STARS ranking, for example, is "strong buy" ranked at S&P. The Quality Ranking ranges from A+ (highest) to C (lowest), with D reserved for companies in reorganization.

By employing these proprietary measures to stock selection and purchases, Stovall says investors could avoid "yielding to temptation" or buying issues that offer a yield that is "just too good to be true" because the payout may actually be unsustainable.--Isabelle Sender, S&P Editorial

View the entire Asset Allocation page from the August issue here.

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