There we were, CDx3 Preferred Stock investors, sitting around, counting up our latest dividend checks when - WHACK! WHACK!.

The guys in the next room, mortgage lenders, were taking a pounding like a Piñata.  What a meltdown. 

But at the same time that those other guys were getting the stuffing knocked out of them, CDx3 Investors, in August, saw the highest dividend rates on new CDx3 Preferred Stocks that we've seen since September 2006! Their loss, our gain - WHACK!

In the last two CDx3 Newsletters (July, August issues), you read about the upward pressure that had been building on interest rates since early June, created by (1) the Federal Reserve Board's continued concerns about inflation and (2) the mess in the mortgage lending industry.  Cash normally available to mortgage lenders started to get hard to come by (WHACK!); cash-hungry lenders became willing to pay a higher price for cash (higher interest rate) to maintain their funding.

The Last Month's CDx3 Investor Results section below explains how CDx3 Investors sidestepped the mortgage lending mess and used the upward pressure on interest rates to grab a "double-benefit" - bargain basement prices plus the highest dividend rates we've seen being paid by new CDx3 Preferred Stocks in a year.  Subscribers to the CDx3 Notification Service received three very welcomed "Buyer's Notification" messages during August.

The effort to continuously improve the quality and readability of the CDx3 Newsletter took a huge step this month.  Those who receive the CDx3 Newsletter by email (rather than from the Preferred Stock Investing Google Group web site or as a link passed along from a friend) got a terrific surprise this month.  The CDx3 Newsletter now uses a new distribution method that creates huge time savings for email subscribers!  The Special Announcement section below explains the new distribution method now being used to send the CDx3 Newsletter to email subscribers.

This month's CDx3 Company Spotlight is on hotel giant Hospitality Properties.  Hospitality Properties owns over 300 great hotels operated as Courtyard by Marriot, Holiday Inn, Crowne Plaza, Hyatt Place and many more.  See if your favorite hotel is owned by Hospitality Properties, issuer of CDx3 Preferred Stocks.

Ever wonder what the difference is between interest income and dividend income - it's all money, right?  The answer to the CDx3 Question of the Month, submitted by BrysonW, explains the difference using a couple of examples, and shows you how the difference led to the ongoing controversy over "double-taxation." 

Through September 30, 2007, you can purchase the signed edition of Preferred Stock Investing for $19.95 and qualify for a $20 Shell Gift Card.  It's like getting Preferred Stock Investing for free.  See the Free Special Offer section for details.

CDx3 Preferred Stocks Hit New Dividend Rate High

CDx3 Investors Sidestep Home Mortgage Mess To Gain "Double-Benefit" Of Buyer's Market

Readers Find Content Of Interest Faster With "Quick-Click Headlines" Feature

Who are these companies that issue CDx3 Preferred Stocks?

From BrysonW:  My CDx3 Preferred Stocks pay me a nice quarterly dividend; but CDs pay interest.  What's the difference between "dividends" and "interest?"

I need to first say that to understand how the difference between dividends and interest pertains to you and your tax situation, please consult a tax professional. 

The answer to this question goes back to a long running dispute between businesses and the U.S. tax code.    Interest is what a business pays you when you loan it money.  A dividend is what a business pays you as your share of the profits, if you're one of the owners (i.e. you own the company's stock). 

But what about the tax issues?  This is where the ongoing dispute over "double-taxation" comes in.

The U.S. tax system operates on a simple principle: if you make $1,000 in revenue, but it costs you $50 to do so, you only have to pay taxes on the net - $950, in this example.  That is, the $50 in expenses is "deductible" off of your revenue before you figure out how much tax you owe.  Fair enough.

For businesses (and individuals) then, it becomes important to carefully track deductible expenses, lest they (you) pay more income taxes than are owed.  Let's look at how the deductibility difference between dividend income and interest income affects taxes:

Example #1: Let's say you start a new business and I loan you $500 to get started (and it's a loan; that is, I receive no ownership position in your company).  And let's also say that your company made $1,000 in revenue by the end of the first year.  For loaning you $500, you pay me $50 in interest at the end of the year.  So, in this overly simple example, when you figure out how much tax you owe, it would look like this:

You would owe $285 and I would owe $15 (on the $50 interest payment you made to me), so the government collects $300 in tax revenue.

Example #2: Now use the same example, except instead of loaning you $500, I insist on part ownership in your company.  Since I am now an owner of the company, the $50 you pay me is considered a dividend, not interest.  A dividend, by definition, is a distribution from profits.  It is not considered a business expense; so, the company cannot deduct it before paying income taxes - the company pays taxes on the $50.  In this example, the tax computation would look like this:

The business would owe taxes on the full $1,000.  The $50 that you pay me in the form of my dividend is considered income to me.  So I must pay tax on the $50 (but at a lower tax rate than if the $50 were paid to me as interest income), even though your company already did.

Comparing the two bottom lines, notice how, when the payment to me is considered a dividend in the second table, your business pays more in taxes, I pay less in taxes and the government gets more money, even though your business did not make any more revenue ($1,000) and neither did I ($50).

So, if the payment to me is considered interest, the taxes owed by the business are less (the IRS gets their money from me).  But if my $50 is considered a dividend (distribution of profit to an owner), the company pays tax on it (since it's in the $1000 they earned as revenue), then I pay tax on it as dividend income.

Double-taxation of the same income is illegal.  Politicians have been posturing over this double-taxation for decades; they will continue to do so.

Thanks to BrysonW for the great question.  You will receive a complementary copy of the CDx3 Special Report Dividend Accounting.