Tax refund spending could lead to investor gains

By Nick Olivari

NEW YORK (Reuters) – Everyone loves a tax refund — but how about getting a return on that refund?

Over $300 billion will filter back to individuals this tax year and at least a third of that will be spent on living costs, clothing, vacations and iPads.

So says a Capital One Bank survey, which found that 37 percent of taxpayers with refunds plan to spend all or part of it immediately. Just 10 percent will use the money for retirement or their children’s college education.

It’s a busy time for brokers, who are also handling a barrage of retirement-related transactions as clients race to make the April 18 deadline for this year’s contributions.

With new funds heading into accounts, financial advisers are looking for ways to put client money to work in an underemployed economy that looks set to expand.

For starters, some are considering the economic impact of all the tax refunds in consumers’ pockets. The Capital One Banksurvey said 4 percent will go into iPads and similar electronic devices. But that leaves a lot of money headed elsewhere. Like 11 percent on new clothing and accessories, and 6 percent on vacations.

Investors who are shopping for ideas might do well to take a cue from these spending patterns.

But some analysts wonder if any bargains are left in that bin. The SPDR S&P Retail index has risen 8.5 percent since mid-March and 50 percent from an August 2010 low.


“I’d expect the big purchase beneficiaries are retailers like consumer electronics Best Buy and,” says Price Headley, chief analyst in Lexington, Kentucky. “The vacation-oriented stocks like hotel and entertainment companies are the biggest beneficiaries for the vacation dollars.”

“With the travel season coming up soon, I’d say Disney and Marriott will get some interest from investors.”

Investors can start by looking at things they know, said Keith Springer, president Springer Financial Advisors in Sacramento, Calif. “It’s always fun to invest in a company, whose products you play with.”

That doesn’t mean you should rush out and buy Apple just because you love your iPad. But Apple’s “i-success” does show what’s possible when consumers get switched on. The company’s stock has quadrupled in two years.

“If you are telling your family and friends about (a product) and they develop the same passion for the product, you are likely on to something that has mass appeal,” said Richard Jackson, principal at Schlindwein Associates LLC in Dallas, an investment planning firm.

But, some caveats should still apply.

“After the initial identification, I would look beyond the products and into the company’s financials: earnings, earnings growth rates, valuation, assets, debt and cash flow,” Jackson said.


Not nearly as exciting as beach vacations and shiny iPads is this fact from Capital One Bank’s survey: Almost 25 cents of every refund dollar spent will go toward ‘everyday living.”

The cost of food and gasoline has been rising steadily in recent years and many analysts say they will likely continue to do so. For investors, this serves as a reminder that many commodities are still in strong demand.

“Commodities need to be part of any well balanced portfolio,” says Sal Gilbertie, President of Teucrium Trading, LLC in Sante Fe, New Mexico.

Political unrest in Africa and the Middle East sent prices soaring this year for oil. Strong demand from emerging economies continues to lift other staples.

Teucrium Trading has introduced three exchange-traded funds in the last year to play basic commodities like corn, oil and natural gas. They are seeking regulatory approval for ETFs in sugar, soybeans and wheat.

Commodities are also a play on global demand and the rising fortunes of the emerging market middle class, Gilbertie says.

“If they even approach the way Americans use commodities, there will be shortages,” he says.

Teucrium’s corn ETF is up 17.4 percent year to date.


Not all refunds are ‘subsistence level.’

Indeed, the IRS sent out more than 4 million refunds averaging almost $10,000 in 2008. Since that time, individuals have been putting cash into safe havens like fixed income.

The tide has shifted this year, and equity inflows have begun to rise. That could mean a lift to stocks as more money returns to the U.S. stock market.

“With the turmoil in financial markets over the last few years, individual investors have become cautious,” says Jim King, president and chief investment officer at National Penn Investors Trust Co. in Reading, Pennsylvania who oversees $2.5 billion in assets.

But with yields remaining low, stocks have become more attractive. Dividends payouts are often higher than returns onfixed income. “You want higher rates of return,” King said.

King encouraged investors to increase their stock portfolio despite the doubling of the S&P since the March 2009 low. He suggested that they look at large-cap stocks.

“We want to do it now rather than wait for stock prices to go substantially higher,” he said.

His company offers the Institutional Advisors Large Cap, the largest U.S. drugstore chain, Industrial conglomerate Danaher Corp and McCormick & Co’s, which sells spices and seasonings.


To be sure, there are those who just want the steady returns from fixed income or even dividend-paying stocks.

Using the average size refund of $3,000 as the minimum investment, Schlindwein Associates’ Jackson pointed out a return of 7 percent per annum on “a very small one time investment” invested for 20 years give you back $12,000, over 30 years $23,000, and over 40 years is $46,000.”

National Penn’s King said that while the threat of inflation has limited opportunities, municipal bonds shouldn’t be ruled out.

“They’ve had a lot of bad press, painted with the same brush as municipalities that are in trouble but that is not the case for all,” he said. “There are a lot of triple-A and double-A bonds, with very strong ability to pay interest and principal.”

For those who would like to keep it simple, with little or no risk, the IRS makes it easy.

By filling in an additional form at tax-return time, they can elect to use a portion of their refund to buy up to $5,000 in low-risk savings bonds, which earn interest and the government says protects owners against inflation. The bonds must be purchased in $50 increments.

But be warned. Bonds issued between November 2010 and April 2011 pay just 0.60 percent.

(Reporting by Nick Olivari, Editing by Bernadette Baum)

Tax refund spending could lead to investor gains