- Baxter (BAX) - $24.67
- Coca-Cola Co (KO) - $49.33
- Kansas City Southern (KSU) - $9.86
- Altria (MO) - $49.28
- Nike (NKE) - $12.00
- Realty Income Corp. (O) - $14.43
- Philip Morris International (PM) - $32.68
- Union Pacific Corp (UNP) - $27.30
- Western Digital Corp (WDC) - $7.20
- Wal-mart Stores Inc (WMT) - $20.41
Total dividends received so far in 2014: $1024.30
Projected forward yearly dividend income: $3863
Projected forward average monthly dividend income: $321.88
Portfolio market value: $124,359
This past month I bought shares of KMI and BP in my taxable account. In my roth ira I sold my position in WMT and CVX and bought shares of ARCP.
ARCP is a REIT that is currently attractively priced. In the past months I learned that it is better to put a REIT in a roth for tax purposes. As far as I understand a REIT is obligated to pay out the majority of its earnings to the shareholders in order to not pay taxes on those earnings. The taxes are then passed on to the shareholders and the dividend from the REIT is taxed at the shareholders tax bracket instead of the 15% or 20% tax bracket for qualified dividends.
The roth ira is a great investment vehicle in the sense that the taxes on any contributions have already been paid and any capital gains are tax-free. Combine this with a high yielding REIT like ARCP that will drip and compound monthly and this seems like a great combination.
Consider the following example as a comparison between a normal dividend paying company and a REIT, both held in a roth ira:
- You hold shares of CVX in your roth. Chevron makes a profit, they pay you $100 worth of that profit. The government takes $15 to $20 depending on your tax bracket, considering long-term qualified dividends. This leaves you with $80 to $85.
- You hold shares of a REIT in your roth. The REIT makes a profit, the pay you $100. The government doesn't take any taxes from the REIT. You as an investor need to pay the taxes, but because it is inside a roth, you never pay the taxes and you keep the full $100.
I may rebuy WMT and CVX in my taxable accounts and will use my roth mainly for REITs going forward. Sometime in the next six months I will most likely sell my position in KSU, because it is currently held in my roth, and use the money to buy some O, OHI, DLR or HCP. I currently hold O and OHI in my taxable account and I want to hold them in my roth, unfortunately I can not transfer the shares, only pure dollars are allowed to be transferred up to the allowed eligible contribution amount. If I decide to sell O and OHI in my taxable account, they will trigger a taxable event, so I want to make sure they get taxed at the long term capital gains tax. I've held O and OHI less than a year so I will hold on to them a few more months at least. I most likely will rebuy KSU in my taxable account as well. I'm just swapping the stocks out of the roth and the REITs into the roth.
I don't care that I only have REITs in my roth and that it does not look diversified in that one account. My roth is only a portion of my portfolio and as a whole my portfolio should be diversified.
Playing with numbers:
I currently have 486 shares in ARCP with a yield of around 7.6%, representing a market value of $6361. If I assume a dividend growth of 3% a year (afterall the yield is already quite high) and monthly compounding (dripping), my investment would have grown into around $87000 in 20 years. In year 20 it would be paying out around $11500 in dividends a year. This is unrealistic as it assumes the prices of the REIT remains the same, most likely the price of the REIT will go up, therefore less shares will be bought and compounding will slow down.
So let's tweak the dividend growth to counterbalance the increase in shareprice:
- 0% dividend growth: $28,500 returning $2,100 a year in dividends in year 20
- 1% divdidend growth: $38,800 returning $3,500 a year in dividends in year 20
- 2% divdidend growth: $56,200 returning $6,100 a year in dividends in year 20
- 3% divdidend growth: $87,400 returning $11,500 a year in dividends in year 20