How Silly is the Times?

In my last post, I mentioned that the NYT story has a graphic showing the savings for various income leves, incuding for a family making $41,000 in household income per year. The tax savings in that graphic assumed that the $41,000 in income family had $500/year each in dividend and capital gain income–an assumption I called “patently absurd”. Let’s see the absurdity in action. Remember that we are talking only about stocks held outside of retirement accounts. What does it take to make $500 in dividend income?

Consider Coca-Cola, a company famous for it’s dividend yield (“The Motley Fool” calls it “The National Bank of Coke”). Coke is paying out $.88/share in dividends this year, meaning you need to own 568 shares of Coke (KO) to get $500 in dividends. At the current price of $37/share, that’s $21,022 worth of stock in Coke held outside of retirement accounts. How many families making $41,000 do you know with that level of stock holdings. Some, to be sure, but it’s very unusual.

What does it take to make $500 per year in capital gains? Let’s assume the market appreciates at 10%/year (you may have heard that the historical rate of return on the S&P and Nasdaq are around 11%, which they are, but thats including dividends, so let’s say 10%). To make $500/year in capital gains, a family must on average year in and year out sell a bit over $5,000 worth of stock. Does that sound like anyone in that income range that you know?