Breakeven Point Before Real Returns

What is the break-even point before you get a real return?

Let's examine.

Consider an investment that returns 5% nominally, that is, the return before taxes and inflation is 5% (like bonds, bank CDs, money market funds, online savings accouts like ING direct, Emigrant direct type of investments). Also assume that you are in 25% federal tax bracket and your state and local taxes are about 5%. The total taxes on the investment return are 30%. The 5% investment return gets trimmed down to 3.5% after tax is taken into the consideration.

We know that the inflation has averaged between 3%-3.5% for the last 50+ years. If you are like me and believe that the Government is low-balling the inflation numbers, you put the inflation average in the 3.5%-4% range. Taking the lower number in this range and subtracting 3.5% from our after tax return of 3.5% leaves you with nothing.

Of course, the income from the tax-exempt bonds or dividend payments from stocks are taxed at lower rates than other income instruments, but the impact of inflation is felt across the board.

After taxes and inflation, a 5% nominal return becomes 0% real return. A 5% nominal return is a break-even point.

If you earn less than 5% return on your investments, then you are in fact losing money, in real terms.

Abnormal Stock Splits

Yesterday I came across the stock of Archer-Daniels-Midland Co. (Symbol – ADM) on Yahoo! Finance. When I saw the split history of this stock, I was surprised and curious. So much so that I have to ask you readers out there who know a thing or two about the reasons behind the unique/unusual/abnormal split history of this stock.

The stock history goes something like this:

• 3:2 on 03-June-1986
• 3:2 on 05-December-1989
• 21:20 on 17-August-1993
• 3:2 on 06-December-1994
• 21:20 on 15-August-1996
• 21:20 on 14-August-1997
• 21:20 on 20-August-1998
• 105:100 on 19-August-1999
• 105:100 on 24-August-2000
• 105:100 on 30-August-2001

I can understand the 3:2 stock splits, but 21:20 and 105:100 surprises me. Why a company would split the stock this way? And why so often?

If you know any other peculiar split history of a stock, let me know by commenting on this post. Thanks.