One of the big news stories yesterday was that the Department of Justice scuttled AT&T's plan to buy T-Mobile. That's not entirely remarkable on the face of it, although it seems to come as a big surprise to AT&T. What is very eye-opening is the fact that AT&T is now on the hook for a $3 billion breakup fee as well as additional consideration to T-Mobile. In other words, if the deal doesn't go through AT&T must pay $3 billion for the privilege of having negotiated with them. To provide some perspective, AT&T paid about $9.9 billion in dividends* in 2010. They'll pay more this year, but...it's a big chunk of change.

Certainly, AT&T's management had to sign off on the terms of a breakup of the deal. A breakup fee is not unusual, and some consideration would have been necessary to achieve agreement on a deal. Nonetheless, couldn't have this been done for some lower level of consideration? How about a measly $1 billion. I'm no expert in this space, but did AT&T's investment bankers fail them here? As I understand it, AT&T's primary banker on this deal was Greenhill, a smaller boutique M&A firm. These are the kinds of guys I cheer for, everything else being equal, but it really seems like they've been outmaneuvered on this merger.

As with any of these deals, this one is far from over. We're likely still in the early innings and I suspect we'll see some restructuring to appease the DOJ in order to get this deal done. Both sides seem to want that, although it seems clear that T-Mobile would get the better end of a breakup.

Speaking of innings, today we learned that David Einhorn has pulled out of his very high-profile bid to rescue the New York Metropolitans from financial disgrace. Oh, the horror! (Sorry, that was a cheap shot culled from my memory of the days when the Mets shared the National League East with the Cubs). Einhorn says that both he and the Mets had restructured their deal in response to bankers, and he thought they were on the same page. Part of the deal included a commitment on the part of the Mets to deal exclusively with Einhorn for a fixed period of time. As the end of that period approached, Einhorn says he was assured by the Mets' investment bankers that he shouldn't worry about the exclusivity clause because the Mets had not intention of dealing with somebody else. When the clause expired, the Mets did just that.

There is probably a reasonable argument somewhere in there that says that Einhorn was naive to trust the i-bankers, but I guess that's the point here. What's so hard about being a little bit honest, even in business negotiations? Maybe the Mets kept their bankers in the dark and I'm being unfair, but somehow I don't think so. I get that their responsibility is to their client, but that loyalty doesn't preclude honest dealings.

The other thing that strikes me as odd is that, if you're unfamiliar with David Einhorn, he runs a large hedge fund, agitates for management changes when he sees fit, and otherwise wields some influence on Wall Street. It's conceivable that he'll run into these i-bankers again, I would think. The good news for Mets-fan Einhorn is that investing with your heart is usually not a path to high returns. I'm looking at these deals from a pretty high-level perspective. What am I missing? Were these two big fails for investment bankers? Feel free to comment with your thoughts.  One thing is for sure:  if this deal ultimately doesn't happen, it will indeed be a bad week for the bonuses of a whole lot of i-bankers.

* For the sake of full disclosure, and to explain my subtle annoyance over the $3 billion number, the Camelback Fund is long AT&T.

I'm not at all sure about the Stacy Smith-as-rockstar commentary, but this is an interesting discussion with Intel's CFO.

Stacy asserts that Intel is a classic example of a company that invests primarily in the US and exports to other countries, stating that 3/4 of Intel's manufacturing takes place in the US, despite the fact that 3/4 of Intel's market exists outside the US, with 50% in emerging markets. That is very unusual for large US manufacturers these days. Furthermore, last week the company announced a $6-$8 billion investment in Oregon and Arizona to upgrade facilities and build a new plant. That is not the first such announcement in the past couple of years. To be sure, this isn't all about altruism. Intel clearly believes in American workers. They had other options, though.

On the job front...as a result of this latest announcement, Intel plans to add 800-1,000 permanent, high-tech jobs. These are high-end, high-paying positions. Beyond that, it's estimated that there will be 8 construction jobs created for each full-time position, and they will last for several years. In this video, it's noted that large plants tend to create 5-7 jobs in ancillary, smaller business for each one created in the new facility. Any way you look at it, that's a lot of jobs, when they are most needed.

Full disclosure:  I'm a former employee and current shareholder of Intel.

Foothills Financial Planning has introduced a new option for savvy investors, called the Camelback Fund. The Camelback Fund is a new breed of fund called a spoke fund - a cross between a mutual fund and a traditional separately managed account. The spoke fund combines the best qualities of these vehicles, leaving the high fees and other negatives behind.

A spoke fund is a collection of separate investment accounts, or spokes, that are linked to and invested in the same way as a primary central account, or hub. The hub account is managed by the portfolio manager, who maintains a significant percentage of his or her net worth in the spoke fund. Unlike mutual funds, spoke funds feature accounts that are independent from other investors. This provides tax flexibility, voting rights and the ability to exclude specific investments on moral or ethical grounds. For more information about spoke funds, please visit http://www.spokefunds.com/.

The Camelback Fund is so named for two reasons, the first for Camelback Mountain, a major landmark in Phoenix, that reinforces the fact that investment decisions are made far from Wall Street. More importantly, the fund looks for companies that behave like camels – fortified to the extent that they can live off of their stored resources, or continue paying dividends – even when times are lean.

“Dividend paying stocks are typically less volatile than non-dividend paying stocks,” said Kevin O’Reilly, manager of the Camelback Fund and CEO of Foothills Financial Planning, Inc.. “They tend not to decline as much as other stocks in a down market. Also, multiple studies have shown that companies paying dividends have outperformed the broader market over long periods. While there is never a guarantee that such performance will be replicated, we think the reasons behind that discrepancy still hold true.”

The Camelback Fund targets firms that have demonstrated a substantial history of paying – and increasing – dividends. In all cases, investment candidates must have fortified balance sheets that ensure a high likelihood that they can continue to pay dividends, and must be strong companies that trade for significantly less than their intrinsic value.

Unlike a mutual fund, which has sales and distribution fees, management fees, trading fees and redemption fees, the Camelback Fund has only a flat management fee. Investors are rarely aware of all of the fees charged by mutual funds. The spoke fund model promotes transparency, so an investor knows how much of his or her investment will go toward fees right from the start.

For more information, please call Foothills Financial Planning at 480.445.9072, or visit www.foothillsplanning.com.

A key question looming on the minds of dividend investors and the stock market in general surrounds the taxation of dividends in 2011.

By way of context, dividends are taxed at the corporate level – as income, as well as at the individual level. This results in double taxation, and has long been fodder for philosophical debate over the fairness of the system. One school of thought holds that individuals should not pay taxes on dividends at all, because they’ve already paid as partial owners of the companies in question.

 In 2003, President Bush signed a tax reform bill into law that brought the dividend tax rates down from the standard wage tax rate.  For “qualified” dividends, taxes were paid at a rate of either 5% or 15%.  Lower income taxpayers saw qualified dividend rates drop to 0% in 2008-2010.  This rate structure mimics the long-term capital gains rates.  Note:  qualified dividends are paid on stocks held for all of the 120 day period around the ex-dividend date, which is the date on which the shareholder base is determined with regard to who will receive dividends.  In other words, if a shareholder owns the stock on or before ex-dividend date, he or she will receive a dividend for that period.

The 2003 cuts were significant, as the top tax bracket had dividend taxes cut from 35% to 15%.  Perhaps more importantly, the two lower brackets dropped from 10%/15% to not paying any taxes on dividends.  Unfortunately, the dividend tax rate is set to expire beginning January 1, 2011.  At that point, taxes on dividends will revert to the rates paid on wages.  Right now it is unclear what will actually happen at that point, however.

Simply extending the lower dividend rate seems like an option.  However, that would be considered a tax cut, which would require Congress to justify under PAYGO rules.  In short, the higher rates are factored into our federal revenue projections, and we’d have to pay for lower rates – even in the case of an extension – by cutting spending or raising revenue somewhere else.

Undoubtedly, any plan to raise taxes on dividends is designed to raise revenues to help pay for the dramatically increased government spending that has taken place over the last decade.  However, in its most extreme form, an unintended consequence could be to weaken the balance sheets of US corporations, such that they are less well equipped to deal with economic downturns.  That is because raising taxes on dividends could incent corporations to use debt instead of equity.  At least, it may dis-incent them to use equity, as the tax would be the same on interest payments as on dividends.

Furthermore, the recent health care bill already includes an additional 3.8% tax on investment income beginning in 2013.  This includes dividends.  So the rate is going up, one way or another.

What makes this a particularly stick situation is that the dividend tax decision impacts the wealthy as well as lower-income taxpayers.  Per a  Wall Street Journal report, the Tax Policy Center estimates that six million lower-income households will return to paying taxes if the Bush administration changes are simply allowed to lapse. Most Republicans, many Democrats, and President Obama have all stated that they believe dividends should be taxes at the lower capital gains rate, rather than standard income tax rates.

Bottom line

It is still anybody's guess as to how this will play out for taxpayers.  How will it play out for investors? Certainly, dividend stocks are more attractive under the current taxation plan than they were when dividends were taxed at the standard income rates.  However, the outsized returns achieved by dividend stocks that I highlighted in a previous blog post were  were largely gained under non-preferential tax rates.  Consequently, the argument for dividend stocks outperforming the market over the long-term remains strong, regardless of the direction of dividend taxes.  Within reason, of course.

Much has been made recently about the story of Grace Groner.  For good reason.  If you're unfamiliar, Ms. Groner died last week at the age of 100.  While working at Abbott Labs, she bought 3 shares of stock in 1935, reinvested the dividends, and lived within her means for the rest of her life.  That investment is now worth $7 million, which she has donated to her alma mater.

There are a couple of interesting story lines associated with this.  Most of them center on frugality and charity.  Again, deservedly so. This is a great lesson in both.  Although she doesn't perfectly fit the mold, Grace Groner's behavior would have made her a good subject for Thomas Stanley's The Millionaire Next Door series.

There are a couple of other vectors here that are interesting, though.  In his Wealth Report column, Robert Frank highlights one of them, which involves the power and risk of putting all one's eggs in one investing basket, especially when that basket belongs to your employer.  He points out that luck played a big role here.

In reality, though, if she had invested in the broader market, she would have enjoyed impressive returns as well.  But how impressive?  That is the story line that is most instructive, and it involves the power of compounding, which is coincidentally a favorite topic of this blog.

Let's look at some data.  In 1935, stocks were up 46.74%.  That's a nice way to launch a long-term investment.  The next year, the market was up 31.94%.  In other words, if Grace Groner would have invested in a broad stock index fund on January 1, 1935 (had they existed then), she would have almost doubled her money after two years!  Of course, the market is a volatile beast, and 1937's 35.34% drop was undoubtedly a good reminder.  Nonetheless, from 1935 through 2009, the average broad stock market return was 12.23%, according to the Federal Reserve's numbers.  What was Grace Groner's return?  By my calculation, it was just under 15.4%, with full reinvestment of dividends, etc.  That is what allowed Ms. Groner to donate $7 million to Lake Forest College.

But what about Robert Frank's assertion that luck played a huge role in her investing success?  How much would she have been able to donate to Lake Forest if she had instead been able to invest in the broad market for 75 years? $919,042.85!  In other words, the difference between a 12.2% and a 15.4% per year average return on a $180 investment for 75 years is more than $6 million and almost 87% of the final value of the investment.

That leads me back to two fundamental points:  1) the power of compounding cannot be overstated, and investing early is a huge advantage if one is hoping to build wealth, and consequently 2) finding inexpensive investment vehicles makes a huge difference, provided the associated returns are similar.  If Ms. Groner had paid 100 basis points, or 1%, for management of her Abbott investment, she would have ended up with a bit less than $3.8 million.