I have been seeing a lot of bloggers/contributors on SA selling stocks. I am not saying these sellers are wrong. It is actually a good idea to seal in the gains when the S&P is at all time high. So why am I not selling?
1) My legendary timing
I have never ever been able to time the market. Every time I buy, the day after the market/stock falls. Every time I sell, the day after the market/stock rises.
*Seriously if you are ever looking for a drop just wait for me to buy. Also willing to sell my powers!
People have been selling O and for good reason. It is overvalued and stuffed to the brim by income investors. So why am I not selling it? Taxes. For the rest of this section assume 25% income tax bracket.
I own 23 shares of O with a potential long term cap gain of $503.88 (if sold right now and subtract $7 for trading fees).
Under federal law people in the 25% level who hold a stock for over one (1) year gets punished with a 15% tax charge. 503.88 x .15%= $75.58. Meaning I receive $428.30 after federal taxes. Not bad.
But not so fast. I live in Missouri which takes six percent (6%) from all cap gains. Long term or short. And not on the $428.30 but on the entire $503.88. Which means $503.88 x .06= $30.24. Meaning $503.88-75.58-30.24= $398.06.
But it doesn't end there. I live in the country but work in the city. If you are a resident of this city or work in it you get an additional one percent (1%) capital gains tax on the entire thing. 503.88 x .01= 5.04.
Cap gains (503.88) - fed long term cap gains (75.58) - state cap gains (30.24) - city cap gains (5.04)=
$393.02 minus seven dollar fee ($7) to reinvest into a new stock = $386.02. Effective tax rate of 23.4%.
3) Loss of income
That cap gain gets added into my ordinary income. If I break the 28% tax level, time for more punishment. Best part? Even with my cap gains I can't find a stock that provides the same or similar dividend based on my Yield-on-Cost. I have more cash but my cash flow went backwards?
I'm stuck in the you're too poor to get poverty benefits but not rich enough to get the tax breaks.
In other words I'm in the lower half of the middle class.
These are the reasons why I don't sell stocks even if it goes overvalued. Here are my criteria for selling a stock
- When I really need the money. Like when I sold MCD because I needed to pay my mother's medical bill.
- When the dividends are cut. Unless there is proof that the cut was to fund and increase future earnings; not pay down debt.
- When the company lost its advantage and it is reasonable that future earnings be below its future debt payment. Basically future cash flow<future debt maturity date.
Disclaimer: Don't follow my advice. Long O short IRS
Pic: is from yelp. It has nothing to do with this blog but I wanted to give it a plug. If you're ever in KC come visit Leeds Diner. $7 and you'll full for the rest of the day.