Government "Helps" Smokers Invest More

I'm sorry, I just can't help it. After 12-plus years writing for The Motley Fool, when I see a news piece about taxes on cigarettes, my mind races to calculate how much more people will now spend on them, and how much they might save by cutting back or quitting. This happened to me recently, when I read about plans to increase the federal tax on cigarettes from $0.39 to $1.00 per pack. This 156% increase is expected to generate more than $30 billion over several years, a welcome cash infusion to a cash-strapped government.

So let's see how this affects average American smokers, shall we? It's an interesting exercise, even if you don't smoke. We all have our guilty pleasures that cost us money -- things that would leave more money in our pockets if we cut back on them or quit altogether.

Let's start with the average price of a pack of smokes. It's actually a difficult number to come up with, as it varies so much. According to Forbes, several states, including North Dakota, had average costs less than $4 per pack. In a few states, such as New York, the average topped $8. 

The first thing such prices suggest to me is that if you really want to cut your smoking costs without quitting, you might do a good job of it by moving from New York to North Dakota.

Scary number-crunching
But let's go with a typical price of $6.50. I'm using that because the numbers I just cited didn't include the $0.61 federal tax increase, which will increase those prices considerably. Now, if you smoke a pack a day and it costs you $6.50 per pack, that comes to $2,372 per year. Think about that.

According to the U.S. Census Bureau, the median household income in 2007 was about $50,000. So if you had $2,372 going up in smoke, that would come to nearly 5% of your entire pre-tax income! (If the household held two smokers, it would amount to nearly 10% of the income.)

Here's why you need to consider what else you could do with that money: If you saved and invested it (about $200 per month) and earned an annual average of 8% over 25 years, you'd end up with more than $190,000 -- which could certainly improve your retirement, don't you think? If you earned the market's average annual gain of 10%, you'd end up with more than $265,000. If your household has two serious smokers, you're looking at a savings of a half-million dollars!

In a funny way, as the price of cigarettes keeps going up, it keeps upping the amount you can save by not smoking. (Or by not indulging in that daily fancy muffin or even that $5 daily lottery ticket.) I wouldn't be surprised to see the average price of cigarettes soar even higher soon, as lots of states are considering raising their taxes on them, too, in an effort to generate much-needed income in this economy.

Beating the averages
You can also aim to earn more than the market, by choosing some individual stocks carefully (perhaps focusing on robust dividend payers) or by parking some of your money in solid mutual fund performers. The Vanguard Capital Opportunity (VHCOX) fund, for example, has posted a 7.7% average gain over the past decade, trouncing the market. Some of its top holdings recently included FedEx (NYSE: FDX  ) , NVIDIA (Nasdaq: NVDA  ) , and Monsanto (NYSE: MON  ) . Although the fund is closed right now, these days, with the market down and many shareholders redeeming shares, many funds are reopening. Lots of other top funds remain open.

For solid dividend payers, you might screen for companies with yields above 3%, five-year dividend growth rates of 8% or more, net profit margins of 8% or more, and five-year earnings growth rates of 8% or more. That will give you a field to consider of companies with some promising metrics behind them. Here are some that popped up when I ran this screen:

Company	Recent Yield	5-Year Dividend Growth Rate	Net Margin	5-Year Revenue Growth
Southern Copper (NYSE: PCU  )	9.8%	92%	32%	37%
Norfolk Southern (NYSE: NSC  )	3.5%	34%	16%	24%
Novartis (NYSE: NVS  )	3.6%	14%	18%	10%
3M (NYSE: MMM  )	3.7%	9%	15%	11%

Source: Yahoo! Finance.

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