Dividend Investing, Discuss

[Toiletcake]

Lets talk about investing in stocks purely for the dividend. I know a few years ago this wasnt so popular because everyone was operating with double digit returns.

Now bank cd's and money market returns are dismal b/c of the low interest rates and what not.

Is anyone investing this way for a nice passive income?

 

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[MJ DeMarco]

I typically don't invest in dividend stocks and much prefer royalty trusts and Master limited partnerships (MLPs). If I was to invest, I'd invest in solid utilities like Southern Co. (SO).

 

[Toiletcake]

Mj, you mentioned in another post that you were heavy into "FAX" if memory serves me. Isn't that a dividend stock?

 

[Toiletcake]

Mj, Can you explain the benefits of royalty trusts and Master limited partnerships as you see it? I see the way the companies are taxed on their earnings is a but different but how does this effect the investor?

 

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[randallg99]

I typically don't invest in dividend stocks and much prefer royalty trusts and Master limited partnerships. If I was to invest, I'd invest in solid utilities like Southern Co. (SO).

by definition and law, RTs and MLPs are set up to spit out wads of distributions/dividends to capture lower tax rates.

in this environment people like Toiletcake are seeking yield wherever they can find it due to reasons already mentioned but why are you invested in them?

my thoughts are the yield chasing crowd is going to drive stock appreciation in a big way methinks.... but interested in your thoughts.

 

[MJ DeMarco]

FAX is a closed-end fund and is more like a bond-paying mutual fund/ETF. It holds dozens of government bonds. Yes, it pays monthly dividends. MLP's have different tax-treatment and their monthly dividends are actually part classified as "return of capital" which gets reduced from your basis. I wouldn't want to be trading these unless you have an accountant to do the tax work on them. MLP's are partnerships.

Unlike a corporation, a master limited partnership is considered to be the aggregate of its partners rather than a separate entity. However, the most distinguishing characteristic of MLPs is that they combine the tax advantages of a partnership with the liquidity of a publicly traded stock.

MLPs allow for pass-through income, meaning that they are not subject to corporate income taxes. Instead, owners of an MLP are personally responsible for paying taxes on their individual portions of the MLP's income, gains, losses, and deductions. This eliminates the "double taxation" generally applied to corporations (whereby the corporation pays taxes on its income and the corporation's shareholders also pay taxes on the corporation's dividends).

Master Limited Partnership (MLP) Definition | Investing Answers

 

[KLPInvestments]

Dividend investing makes no sense at all when you really think about what you are doing here. The goal of any investor should be to get the highest possible after tax return...period. Dividends are but a fraction of total return. They also trigger a tax when paid out...which in turn interrupts the compounding dynamic of this asset class. You are not really any richer when the dividend is paid than before it was paid. The cash distributed was already owned by you the shareholder anyway. What is more, the price of the stock will fall by the amount of the dividend paid. So you gain one dollar cash, and your stock value falls by one dollar.....meaning no material change in your end wealth. Dividends can be seen technically as a partial liquidation of a company's assets, or as a return of cash to shareholders. There is nothing wrong with dividends. There are actually many scenerios when it makes sense for a company to pay a regular dividend or even a special one time dividend.....but to make these dividends the focus of any investment program is usually misguided.

As an aside, I write this from the prespective of an enterprising investor rather than a passive one. I realize there are situations where dividends paid by safe investments are attractive to those who seek income from these dividends.

 

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[GreenHouses]

If its a highly profitable business then the shareholders' wealth grows quickest when earnings are reinvested back into the business rather than paid out as dividends.

Having said that, I do like getting dividends.

Horses for courses.

 

[randallg99]

we are going to see a huge influx of cash flow into income producing vehicles, especially dividend producing stocks.

Distributions come in many forms: partner K1 distributions, actual dividends, Return OF capital, Return ON capital, etc.... and each one has a different tax consequence.

Foreign distributions have a tax witholding that you can't claim if the divvy/dist. was paid in an IRA account, so knowing this very fact will help you keep that 15% witholding if you keep it in a tax bearing account.

Partnership distributions at certain levels create a UBIT liability which can be a real SOB for filing.

Just do your DD before acquiring the stock and make sure you learn the consequences. Many times the investor relations office for the company you are interested in will help you. All you have to do is call them.

Now, in this market environment I really believe we are going to see a tremendous "yield chasing" phenomenon. There is a lot of retail investor money that is not getting the yields once enjoyed by owning treasuries. Even corporate bonds are peaking, thus their yields are much lower and after we've experienced the bail outs, retail investors have seen there is no advantage to being a bond holder anymore. The risk is wholly shared by share holders and bond holders alike.

New precedents have really shaken up the investing arena.

That said, people will gravitate to more riskier investments to achieve higher yields, but truth be told the corp bonds now carry the same risk but with less reward!

This will cause retail investors to switch from corp bonds to the equities market and drive stock appreciation in a very big way. VNR for example, absolutely should not be a stock trading in low 20's and now its yield is 8-9%. In my view, owning this stock should yield at 15% due to its risk factor.

But as people scan for yields in their stock screener, that 8% really looks very appealing and this stock can hypothetically increase in value though I would advise against buying it!

A lot of people are starting to do just this and its a repeat of the markets shortly after the dotcom bust when I became heavily invested in Novastar and Hanover mortgage backs. (both paid handsomely)