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Last week I talked about some relatively simple steps you could take to streamline your finances and increase your wealth in 2011.
Today, I want to follow up on that story and talk about two of the biggest income investing trends I see for the upcoming year.
Let’s start with one of my favorite topics …
Corporate Dividends: Three Reasons to Expect
Higher Payments This Year and Beyond
I’ve written about the recent rebound in dividend payments before, and we saw particular strength as 2010 came to a close.
But I believe companies will only increase their payments more aggressively this year.
Here are three reasons why:
1. Corporate coffers are stuffed with cash.
According to a recent report from the U.S. Federal Reserve, non-financial firms had total cash and other liquid assets of $1.93 trillion at the end of September vs. $1.8 trillion just three months earlier … making up 7.4 percent of total assets held by corporations, the highest since 1959!
All of this money has to go somewhere, and I think a big portion of it will funnel out to shareholders via bigger dividend checks. Especially because of …
2. The recent extension of the Bush-era tax cuts.
The recent tax deal in Washington means dividend payments will continue to be taxed at very favorable rates in 2011 and 2012.
That’s great news for anyone collecting these checks … but it’s especially positive news for many executives.
After all, they often receive a substantial amount of dividend income from their large ownership stakes.
So that means these tax implications likely benefit them more than even average shareholders … giving them a strong personal benefit for doling out fatter dividends this year!
Plus …
3. Should interest rates rise from here, America’s boardrooms will only feel more compelled to attract investors with bigger dividend checks.
We have already seen the “bond vigilantes” start battling against the Fed’s second round of quantitative easing and Washington’s continue fiscal irresponsibility.
Essentially, the world’s investors are getting concerned that deficits in the U.S. are nearing the point of real danger … so they’re demanding more interest on the loans they make.
And heck, even if interest rates bounce around this year, they certainly aren’t going much lower!
That means dividend payments will have to rise to stay competitive with other investments in the marketplace.
Okay, you say, but what about share prices? Will they go up or down from here?
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Well, there’s no doubt that stocks have already had a pretty strong run from their March 2009 lows.
But whether or not we see a near-term pullback, I think we could still see modest gains from here over the course of this year.
After all, U.S. shares have yet to regain their previous highs, which would translate to upside of at least another 20 percent from current levels.
Meanwhile, with corporate cash at record levels, there will be plenty of M&A activity and buyback activity going on over the next year. Both of these trends are favorable for stock prices.
Plus, there are also historical precedents like the Presidential Cycles, which I talked about here two weeks ago.
So I think we could see broad stock market gains between 5 percent and 10 percent in 2011 … with the chance for an even higher rise depending on momentum.
Meanwhile, I Also See the Potential for
Big Social Security Reforms Coming
I believe 2011 will be the year that lawmakers get serious about “fixing” Social Security again.
As I reported here last month, the Social Security Administration just did away with one of the little-known provisions that actually gave savvy folks the chance to increase their payments … largely because professionals like me were touting it.
In addition, I would like to point out something that most folks have not noticed about the new tax deal … it will actually mean LESS money going into the Social Security system in 2011!
Reason: One of the tax deal’s provisions reduces the amount that workers will pay into Social Security by two full percentage points.
In other words, rather than paying in a full 6.2 percent of their pay — up to a cap of $106,800 — U.S. workers will only contribute 4.2 percent this year. (For their part, employers and the self-employed will continue to contribute another full 6.2 percent.)
Now, lawmakers have said they’ll make up for this by taking more money out of the general fund. But that’s like simply transferring a credit card balance from MasterCard to Visa!
Meanwhile, even if we assume that this reduction will only last one year … it comes at a time when Social Security is already facing massive shortfalls!
So there are no two ways about it … an unavoidable day of reckoning is near.
The system’s last major overhaul came in 1983, and this time I think we’ll see a big impact on both “wealthier” recipients and anyone farther away from collecting — especially through higher taxation of benefit checks.
The upshot is that we will all need to work even harder at building up our private income portfolios in 2011 and beyond. But given the possibility for richer dividends, I also think we’ll have plenty of opportunities to do so throughout this year.
Best wishes,
Nilus
P.S. Want my best dividend stock ideas in 2011? Then take a risk-free trial to my Income Superstars newsletter! Just click here for all the details.
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You’re right that the 2% reduction in the payroll tax will reduce government overall income. But it will not change anything about social security. Whether or not that 2% had been paid the social security trust fund would still consist almost exclusively of federal bonds. And it will have the same amount of federal bonds, 2% reduction or not.
If you are arguing that the federal government will default on the bonds owned by the Social Security trust fund, that’s a much more serious argument. Why would it default on those bonds and not others. It will probably default on all federal debt or none of it.