Thursday, November 09, 2006

PID and Tiparillos

A reader asks:
Hi MP. I found you when I was searching for info on [PowerShares International Dividend Achievers] (PID). I am intrigued with it, but I've never bought anything outside my ROTH or 401k before. Do you think it's a bad idea for a taxable account?

Investment returns stem from capital gains and dividends. Under the current tax structure long term capital gains and qualified dividends are favored with a 15% tax rate. Bond interest, dividends from REITs/BDCs and short term capital gains get taxed as ordinary income. As a matter of strategy you should put things like REITs and bonds inside of IRAs/401k while putting less tax sensitive assets in taxable accounts.

Mostly I like PID because it is a source of dividends and growth that is less sensitive to the results of the US economy and US dollar. Most Americans have plenty of exposure to the US economy, because they live and work here. Hence they need safe global exposure.

For a core equity position I recommend about 30-50% exposure to non-domestic assets. I think PID fits that role quite well, being a diversified set of US-listed companies with a history of rising dividends. It performs nicly and yields a little bit more than the iShares MSCI EAFE Index Fund (EFA) does.


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