White Papers

In the current environment of low interest rates and bond yields, investors seeking income might consider looking to dividend-paying stocks as an investment option. History has shown that investing in dividend-paying stocks not only provides shareholders with income, but also has been an attractive investment strategy in terms of total return and as a complement to fixed income investments. 

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Turmoil may not be a strong enough word to describe this past week in the financial markets. U.S. equities have fallen at an unprecedented rate, resulting in a loss of over $5 trillion of value from its peak (14% of market value).

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History was made on August 14, 2019, with the recording of the lowest closing yield (2.02%), on the 30-year U.S. Treasury since regular auctions began in 1977. The previous lowest closing yield (2.099%) was recorded on July 8, 2016.

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Since its origination in 1986, the London Interbank Offered Rate (LIBOR) has been a standard benchmark for short-term rates. LIBOR is reset daily based on submissions from a collection of contributing banks. These banks submit yields at which they believe they could obtain short-term loans from other banks. The average rate sets the benchmark for floating rate securities and other financial transactions. 

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The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law on December 22, 2017. Most provisions of the new law affecting individuals and businesses went into effect on January 1, 2018, including new tax brackets and new standard deductions. One of the most dramatic changes is the approach to corporate taxes. TCJA lowers the corporate income tax rate to 21% and moves the United States from a worldwide to a territorial system of taxation.

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Tax rates are an important consideration in fixed income asset allocations. Many investors in high tax brackets assume they should be invested entirely in tax-free municipal bonds, while tax-exempt investors (e.g. foundations, pensions funds) ignore tax-free bonds altogether. In both cases, investors would be better served to consider a more balanced approach, focusing on the potential after-tax return and risk of all fixed income sectors.

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