Which Stocks To Buy With Your Tax Refund
The annual tax season mania not only takes over the marketing avenues we see every day, but it also takes over the judgement of our financial habits. Before we even receive our tax returns we already process an idea of how we will spend the extra cash. The problem is we are overlooking the actual tax return process. The money we receive through a refund (if any) is not extra cash. This is money you have already paid in taxes throughout the previous year. You are returned the difference of what you have already paid and what you actually owe.
First we have to refocus what are more important, investment goals or spending sprees? We easily can take a tax refund to go out to buy jewelry, take a vacation, or go crazy at the shopping outlets, but does that help your financial health now and later?
The refund from the past year’s income was money you did not see on a paycheck or monthly basis, so technically it had no effect on your daily spending habits. Therefore, rather than making a repulsive spending moment, take the tax refund and invest the majority of it into your future. No cliché talk or investing quotes are necessary. The beauty of investment compounding just makes the potential future worth of this year’s tax return so much sweeter.
The great successes in investing come from long-term compounding from a reasonably small start. Taking a small lump sum today and letting it grow with an outstanding investment vehicle like stocks or a mutual fund will deliver a substantial pot of funds later. This approach is integral for young professionals to fuel their retirement portfolio for the longevity that will amass them a fortune for a comfortable post work era.
For those who already have an investment portfolio rolling, then this time should be a breeze. If you have already targeted where your refund money will be invested in, then awesome, carry on. Now, if there is not an investment portfolio tied to your name at this point, then please take this opportunity to invest this cash. How often do you receive a lump sum amount of money, outside of your normal bi-weekly or monthly income, which can without a doubt be used to increase your net worth?
Any tax refund below $500 may not seem large enough to make a difference as an investment, but that is incorrect. There are plenty of excellent companies trading stocks for under $50, which can allow you to acquire at least 10 shares. As long as it is a great company the shares have the potential to appreciate over many years, pay dividends, and maybe have a stock split that doubles or triples your share count. Also, $500 can surely be invested into a mutual fund, index fund, or a child’s 529 college plan.
Depending on the dollar size of your refund there are a reasonable number of strong stocks worth acquiring. The goal is to purchase a minimum of 10 shares of a company per trade to truly make a difference in returns over time, in addition to the cost of commissions reducing the overall return. I’ve done some research to provide a few options of positions to consider acquiring based on the level of tax refund expected to be received. These are not items of advice, rather data showing which companies fit within your refund value and those with excellent current financials and growth potential.
Refund of $500 – $1,000
Receiving a refund just above $500, but less than one grand is not a bad thing. There are several outstanding companies you can buy at least 10 shares of with that much money. All of the below four companies are trading around $50 per share, so between $500 and $1,000, you can buy anywhere from 10 to 15 shares.
Nike Inc. (NKE)
Leader in sportswear apparel and branding
Return on Equity – 30%
Earnings per Share (EPS) 5 Year Growth – 14%
Starbucks Corp. (SBUX)
Leader in the coffee industry, while battling McDonald’s as the top breakfast stop.
Return on Equity – 48%
Earnings Per Share (EPS) 5 Year Growth – 18%
5 Year Dividend Growth – 24%
Wells Fargo & Company (WFC)
Third amongst the big four financial institutions in total assets.
Profit Margin – 25%
5 Year Dividend Growth – 25%
Verizon Communications Inc. (VZ)
An excellent choice for those interested in high dividend payments.
Dividend Yield – 4.41%
Refund of $1,000 – $2,500
All of the companies in the previous group can still be considered with a higher number of shares or in conjunction with one of the following. However, the below options can also be chosen solo for a total of 10 through 15 shares. With outstanding financials and growth track records these three companies will produce longevity for a portfolio.
TJX Company (TJX)
This one is for the shoppers looking for the company that can provide satisfaction of their familiar stores.
Return on Equity – 52%
5 Year Dividend Growth – 22%
Facebook Inc. (FB)
With all the new social media outlets arising, FB remains the most used daily and its growth trajectory is rapid.
Profit Margin – 30%
Earnings Per Share (EPS) 5 Year Growth – 49%
5 Year Revenue Growth – 55%
Visa Inc. (V)
Although it may not be the largest global credit card service provider, Visa’s consistency makes them a top play for years to come.
Profit Margin – 39%
Return on Equity – 20%
5 Year Dividend Growth – 30%
Refund of $2,500 – $5,000
The below three companies are staples in their sectors that will last for decades to come. They have proven as the elite in their respective markets, plus have provided shareholders with appreciating value over many years. All three are trading over $100 per share, so this refund level will allow you to collect at least 20 shares of one of the three plus an addition of any of the previous companies above or as much as 30 in one of the below three.
Berkshire Hathaway Inc. (BRK-B)
This is simply a bet on Buffett play. Not just his current moves, but also his philosophies he will leave after he steps down.
Profit Margin – 10%
Earnings Per Share (EPS) 5 Year Growth – 10%
Apple Inc. (AAPL)
The king of the personal electronics industry will stand atop the market for many years with little worry from any competitors.
Profit Margin – 21%
Return on Equity – 36%
Earnings Per Share (EPS) 5 Year Growth – 16%
Boeing Co. (BA)
When will we stop producing aircraft? The likelihood of eliminating air travel for civilians and uniform personnel is nearly impossible.
Return on Equity – 97%
5 Year Dividend Growth – 17%
Refund of $5,000+
Alphabet Inc. (GOOGL)
Due to the stock price being so high this is only an option for those collecting a refund above $5,000. There is no interest in having 1 share, so with this level of refund a person can acquire at least 5 shares. Alphabet, Google, same company we all use most likely every day. The long-term growth of this massive tech company is far greater than possibly 90% of every other blue chip stock available, still over a decade after its foundation.
Profit Margin – 22%
Return on Equity – 15%
5 Year Revenue Growth – 20%
There is no persuasion towards choosing any of the above options. This is just the picture of what opportunities are available. Sure there is nothing wrong with taking a portion of your tax refund to pay debt. That is actually at the top of the list of things to do with a lump sum of funds. But this judgement should compare the level of interest versus the return on investment potential. Say there is a loan carrying between 2-3% and the balance is a modest $3,000. The average annual return for the S&P 500 index is 7%. Since the debt may not be putting a chokehold on your monthly lifestyle, why not use majority of your tax refund to potentially gain a 7% return on your money?