10-05-2015, 06:36 PM
If a stock is truly overvalued, it should revert to fair value eventually. The real question I was trying to answer was at what level of overvalue does it make sense to take advantage of the excess capital the market is offering. My conclusion was that I don't want to sacrifice income due to capital gain taxes. The formula was derived as a rule-of-thumb for the breakeven point.
My basic assumption is that yield for good dividend growth stocks tend to be in a narrow range and the yield of an overvalued stock is reduced, since it is overvalued. It is this difference in yield that is used to compensate for taxes. Many stocks should be available at fair value, so it is not necessary to chase higher yielding stocks.
My basic assumption is that yield for good dividend growth stocks tend to be in a narrow range and the yield of an overvalued stock is reduced, since it is overvalued. It is this difference in yield that is used to compensate for taxes. Many stocks should be available at fair value, so it is not necessary to chase higher yielding stocks.