Since I began investing a few years ago, I've always read that I should fill tax-shelters with bonds first, and then let stocks spill over into taxable accounts if necessary. It still comes up often, but the idea seems to rely almost entirely on two facts that are changing:
1. Dividends from stocks (if "qualified") are taxed at rates lower than interest income, which has only been true for the last decade, and will no longer be true (as the law is currently written) on 1 January 2013.
2. Stock dividend yield is usually lower than bond yield, which was not true before 1960, and is no longer true today (S&P 500 yields 2.2% while the total bond market yields 1.7%).
So as I see it, in a few months stocks will actually be more expensive than bonds to hold in a taxable account. Your thoughts?
First, this is assuming congress takes no action. And then, it is assuming that CEO's of these "dividend" companies (who are heavily invested in their company and know they always need an exit plan) won't make changes to keep the share price from plummeting.
Next, Is it fair today, to take a snapshot in time and extrapolate it out forever? In other words, will the S&P 500 continue to have a higher yield than the total bond market? Certainly, we all want to look at our after tax return.
If the overall question is, will changes need to be made if the current tax laws don't remain in place? The answer is yes. But I'm waiting until the Rube Goldberg machine in Washington poops something out.