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1.
When are taxes on an investment's capital gains due?
In the year that the investment is sold. Although gains may occur, no tax is due until the investment is sold. This may or may not occur at one's retirement age.
2.
When are taxes on an investment's dividends normally due?
In the year that the dividends occur. Dividends are immediately taxable. If they are earned in a tax-deferred account, then they will be due years in the future, but this is not the normal situation.
3.
What are the two components of total return?
Dividends and capital gains. Total return includes both price appreciation (capital gains) and income (dividends).
4.
What ultimately drives price appreciation of stocks?
Anticipated dividends. Ultimately, what causes stock prices to go up is the anticipation of dividend payouts, even if investors understand that there will not be dividends for many years.
5.
With a dividend reinvestment plan (DRIP) for stocks, what happens to reinvested dividends?
They purchase additional shares of stock for you. DRIPs will actually buy additional shares for you; this is a way of investing on autopilot.
