• Class of capital stock that pays dividends at a specified rate.
• Has preference over common stock in payment of dividends.
Tax Considerations
• Dividends are taxable in the year they are earned.
• Appreciation or depreciation (capital gain/loss) in the value of the stock is not calculated for taxes until the year the security is actually sold.
• There are a wide variety of preferred stocks. Corporations have traditionally invested in preferreds as they receive 70% exclusion on taxation of dividends. However, there are now several new types of preferreds that do not receive this exclusion. Assure you understand the features of any preferred prior to recommending and direct corporations to their tax advisor.
Market Values
• Stock price will usually tend to stay more stable than common stocks.
• Price could be affected by poor financial reports from the company.
• Prices are largely determined by longer-term interest rates.
• The credit quality of the company is also a primary determinant of price.
• Secondarily, many preferreds are callable by the issuer affecting the price as the call date nears.
• Finally, some preferreds trade relatively infrequently making liquidity an issue.
Common Stock
Common stocks can generally be subdivided into the categories of growth or value.
Growth Stocks
• Stock from companies enjoying a rate of growth in revenue and earnings above the rate earned by the market as a whole.
• Such stocks typically are found in fast growing and newer industries and have above average Price/Earnings (PE) ratios, pay little or no dividends, and reinvest capital back into the business for expansion.
Value Stocks
• Companies have fallen out of favor or are under priced for one reason or another.
• Value stocks typically are characterized by slower current rates of growth in revenue and earnings than the market as a whole, pay above average dividends, have below average Price/Earnings (PE) ratios, and diminished expectations.
• Investors in value stocks often seek a catalyst for improved performance such as a new product, new management team or corporate event such as the sale of an unprofitable business.
Companies are further classified by their size. The following information is based on Morningstar standards. (These standards will fluctuate with market conditions).
Large Cap Stocks
• Stocks with a market capitalization of $4.4 billion or greater.
• Large Cap stocks with a Price/Book ratio of 6 or less would be considered Value stocks. (If no P/B ratio is available, the P/E ratio of 26 or less is used).
• Stocks with a Price/Book ratio greater than 6 would be considered Growth stocks. (If no P/B ratio is available, a P/E ratio of more than 26 is used).
Mid Cap/Small Cap
• Stocks with a market capitalization of less than $4.4 billion and a Price/Book ratio of 2.62 or less are considered “Small/Midcap Value”.
• If no P/B ratio is available, then a P/E ratio of 26 or less categorizes a stock as “Small/Midcap Value”.
• Stocks with a market capitalization of less than $4.4 billion and a Price/Book ratio of greater than 2.62 are considered “Small/Midcap Growth”.
• If no P/B ratio is available, then a P/E ratio of greater than 26 categorizes a stock as “Small/Midcap Growth”, investing in companies this size generally entails more risk than larg cap stock.
Income Stocks
• Stocks that pay higher than average dividends.
• Less market volatility, but less appreciation potential.
• Typically Utility Stocks, Preferred Stocks, REITs.
International Stocks
• International Stocks (non-U.S.) represent approximately half of the world's stock market capitalization. Stocks of International companies generally are riskier than domestic companies and may include risks such as currency and political risk.
• Stocks of companies that are registered outside of the United States on a foreign stock exchange.
• Stocks are usually differentiated as either an Emerging Market (i.e. India) or
Developed Market (i.e. Germany).
• Stocks are denominated in local currencies of their respective country.
• Recent findings indicate that the interdependences (i.e. higher correlation) among the U.S. and non-U.S. markets are significant; however, there is still room for international portfolio diversification
Tax Considerations
• Dividends are taxable in the year they are earned.
• Appreciation or depreciation (capital gain/loss) in the value of the stock is not calculated for taxes until the year the security is actually sold.
Market Values
• Values fluctuate continuously.
• Earnings/lack of earnings will cause fluctuation.
• General market conditions will cause fluctuation.
• Sector market conditions will cause fluctuation.
• Mergers, acquisitions or other business events will cause fluctuation.
Total Return Stocks
General Investment Features
• Stocks that offer both good dividends and growth potential.
• Typically large, established companies.
• Two most common types:
- Blue Chip Stocks
_ Common Stock of nationally known company with long record of profit growth and dividend payment.
_ Reputation for quality management, products, and services.
_ Typically relatively high priced and have moderate dividend yields.
_ Usually “Large Cap” companies—companies that have been in business for a while and have an established record of performance.
_ Have the financial strength to weather even severe periods of economic weakness.
- Utility Stocks
_ Stock from companies that distribute electricity, gas, and water to their customers.
_ Usually offer above-average dividend yields to investors, but less capital appreciation potential.
Tax Considerations
• Dividends are taxable in the year they are earned.
• Appreciation or depreciation (capital gain/loss) in the value of the stock is not calculated for taxes until the year the security is actually sold.
Market Values
• Blue Chip stocks tend to follow market indexes.
• Utility Stocks:
- Sensitive to interest rate movements.
- Higher rates tend to adversely affect utility stocks because investors can find more attractive alternatives and utility companies generally have high debt expense.
- Lower rates tend to support utility stock prices for the opposite reasons.
Aggressive Growth Stocks
General Investment Features
• Stocks of rapidly growing companies that have histories of and offer prospects for above average profit growth.
• They usually do not pay dividends because they are reinvesting the capital into the growth of the company.
• They offer more growth potential but higher risk since they usually have a limited operating history and record of profitability.
Tax Considerations
• Dividends are taxable in the year they are earned.
• Appreciation or depreciation (capital gain/loss) in the value of the stock is not calculated for taxes until the year the security is actually sold.
Market Values
• Stocks will fluctuate because of earnings/lack of earnings of the company.
• News that changes assumptions about the company’s ability to meet growth expectations will cause fluctuation.
• Stocks typically will move higher or lower than the market indexes.
This is not intended as tax advice and you should discuss specific tax implications with your tax advisor.
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