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Finance: What is Aftertax Yield? 8 Views
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Description:
What is After Tax Yield? After tax yield is simply how much an investment makes (or yields) after taxes have been paid. This term refers to bond yield; bonds are taxable as federal income, so after tax yield varies due to differences in tax brackets.
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
- Terms and Concepts / Bonds
- Terms and Concepts / Company Management
- Terms and Concepts / Econ
- Terms and Concepts / Ethics/Morals
- Terms and Concepts / Financial Theory
- Terms and Concepts / Investing
- Terms and Concepts / IPO
- Terms and Concepts / Managed Funds
- Terms and Concepts / Metrics
- Terms and Concepts / Muni Bonds
- Terms and Concepts / Mutual Funds
- Terms and Concepts / Regulations
- Terms and Concepts / Stocks
- Terms and Concepts / Tax
- Terms and Concepts / Trading
Transcript
- 00:00
Finance a la shmoop... what is after-tax yield, well we'll presume you [Yield definition on 100 dollar bill]
- 00:08
know what standard yield is yeah okay so you have a stock trading for a
- 00:12
convenient exactly 20 bucks a share it pays a quarter a share four times a year
- 00:17
is a dividend or a dollar a year total in dividends its dividend yield is one
- 00:23
over twenty or five percent right you buy share for 20 bucks you get a dollar a
Full Transcript
- 00:28
year back but you the investor pay tax on that buck a share of sweet hot
- 00:33
dividend love if you're a 35 percent bracketed taxpayer that is you pay 35 [35% taypay circled]
- 00:38
percent tax on the last dollar of your income well then you only keep 65 cents
- 00:43
on each dollar of dividend income that you receive and yes we note that there
- 00:47
is both federal and state and you know sometimes other taxes that go in here [List of taxes on sticky note]
- 00:52
like the Obamacare flavors or other county taxes but in total we're just
- 00:57
saying let's make up a story here that if you pay 35 percent tax on that buck
- 01:01
then your real after-tax yield is a lot less than the 5 percent the company
- 01:06
distributes to you, you calculate your after-tax yield by replacing that
- 01:11
"gross" dividend of a buck with a 65 cents of dividend that you keep [After-tax yield calculation]
- 01:16
after-tax in the numerator like that and then that 20 bucks you paid per share of
- 01:21
gently-used pacemakers dot-com stays in the denominator down there it looks like
- 01:26
this 65 cents divided by 20 bucks and that's 3.25 percent that
- 01:31
is 3.25 percent is your after-tax yield so that's as it applies [Man discussing after-tax yield to stock]
- 01:36
to stocks what about as it applies to bonds well in a way this calculation
- 01:41
matters a lot more because there's an entire industry in muni-bonds which pay
- 01:45
lower total rates of interest but which are generally insulated from paying [Person holding a muni-bond]
- 01:49
taxes so in a way muni bonds compete against fully taxable corporate bonds
- 01:54
for your bond investing dollar well tax rates for qualified dividends
- 01:58
meaning they're qualified for the various deductions from equity
- 02:01
investments are usually meaningfully lower than ordinary income rates so
- 02:06
let's look at the individual paying 35 percent marginal tax on long [Magnifying glass focuses on womans face]
- 02:10
term investment gains well they're likely paying something close to 50% tax
- 02:14
on ordinary income so we have a tale of two bonds foam depot corporation whose
- 02:19
bonds pay 7% and we're in the muni-city muni bonds which pay 4% which is better
- 02:25
the two bonds are of identical credit risk and if you're Joe hard-worker high [Hoe hammering a roof]
- 02:30
tax payer and supporter of government pork then which of these two bonds gives
- 02:34
you a better after-tax yield well if you pay 50 percent ordinary income tax then
- 02:40
you're 7% on that corporate is half or 3.5% after-tax that's the after-tax
- 02:46
yield got it and your muni bond carries no tax liability to you so the 4%
- 02:51
gross is the four percent net as well answer well go with the muni bond
- 02:56
and you two will be you know in the muni [Man discussing muni-bond after-tax yield and hat lands on his head]
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