Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

A Tax Break (Up To 20%!) For Dividend Investors? It’s True

By Contrarian Outlook (Brett Owens)Market OverviewFeb 26, 2020 06:19AM ET
www.investing.com/analysis/a-tax-break-up-to-20-for-dividend-investors-its-true-200510758
A Tax Break (Up To 20%!) For Dividend Investors? It’s True
By Contrarian Outlook (Brett Owens)   |  Feb 26, 2020 06:19AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

If you own any real estate investment trusts (REITs), make sure you forward this article along to your tax advisor!

Historically, REIT distributions have been considered nonqualified dividends by the IRS. This means they usually get taxed at your regular income tax rate.

However, REIT investors now benefit from the same tax break that “pass through” businesses receive. As a general rule, REIT investors are now allowed to deduct 20% of their REIT dividend income.

Before we dive deeper into the REIT equity pool, let me give the usual disclaimer that I am not a tax professional myself. (I do, however, spend a healthy amount of time in my CPA’s office keeping him and his staff hustling to crunch the numbers on my various business interests.)

Now, back to REITs. For whatever reason, income investors don’t buy enough of them, in my opinion. Perhaps it’s because these stocks get lumped into one asset class (like utilities, or municipal bonds.)

But REITs run the gamut, from retail landlords (which have been getting crushed) to self-storage REITs (which benefit from Americans accumulating more and more “stuff” and having to put it somewhere).

For example, let’s take one of the best retail REITs, Simon Property Group (NYSE:SPG), and compare it with my favorite self-storage REIT, National Storage Affiliates Trust (NYSE:NSA). Both are best of breed in their respective industries. However, one breed is becoming increasingly extinct!

I’ve never recommended SPG because, in recent years, I’ve been concerned that Amazon.com (NASDAQ:AMZN) was simply going to eat its tenants’ lunch. After all, Amazon packages arrive at our doorstep daily, and each purchase we make on Amazon is one less drive we make to a local store (one that, potentially, has a rent payment due to Simon.)

On the other hand, National Storage runs facilities and rents out space in the fastest growing markets in the US. When we initially bought the stock for our Hidden Yields portfolio in August 2016, the locations that housed the vast majority of its facilities (92% of them!) were projected to grow 45% faster than the national average.

The rising tide lifted NSA’s payout and stock price. Meanwhile, the Amazon cloud put a lid on SPG. SPG was the same “investment vehicle” as NSA in theory, with polar opposite returns in practice!

2 REITs with Nothing in Common

NSA SPG Total Return
NSA SPG Total Return

Financial websites say that NSA yields 3.5% today, but it’s going to pay even more over the next 12 months. The stock raises its dividend every couple of quarters (usually twice a year). Which means we can safely pencil in at least 3.7% from NSA in dividends in the year ahead.

(And given the choice between the 3.7% from NSA or another non-REIT, we’ll likely take the REIT and the tax break.)

What if we need more current income? After all, we could pile a million bucks for $37,000 or so in an annual dividend salary. That’s not bad, but there are REITs that pay even more.

For investors who need a pay raise today, consider a mortgage REIT like Blackstone Mortgage Trust (NYSE:BXMT). Business-wise, it has nothing in common with SPG or NSA. But its REIT structure, like SPG and NSA, means the firm:

  1. Receives its own tax break from Uncle Sam, provided that
  2. It dishes most of its profits to us in the form of payouts.

The firm sports a $0.62 per share quarterly dividend (good for $2.48 per year) that is well-covered by earnings. This equates to a generous 6.2% current yield at today’s prices.

Parent company Blackstone (NYSE:BX) Real Estate’s access to deal flow has helped BXMT build this impressive and geographically diversified commercial loan portfolio in just over six years:

The Sun Rarely Sets on BXMT’s Budding Commercial Empire

BXMT Geographic Footprint
BXMT Geographic Footprint

Another benefit of BXMT having access to (read: sharing) Blackstone’s management team is the know-how and expertise to write a smart deal.

Its weighted average loan-to-value (LTV) ratio is a conservative 62%—which means it has a big 38% equity cushion against real estate price declines. (Contrast this with your average home buyer who has perhaps 5% to 10%—or rarely an old school 20%—equity cushion via his or her down payment.)

BXMT’s oldest existing loans are 6+ years and, impressively, there has not been a bad one yet!

A perfect 100% of BXMT’s loans are being paid on time.

Again, on paper, BXMT is the same “type of stock” as SPG. Both are REITs, a classification that should make your CPA smile. However, once again, that’s where the similarities end.

If you’re a Contrarian Income Report subscriber, you’ll fondly remember when we added BXMT to our portfolio three years ago. We didn’t do it for the tax benefits—we did it for the dividends, and stayed for the price appreciation:

2 More REITs with Nothing in Common

BXMT SPG Total Return
BXMT SPG Total Return

How long REIT dividends will enjoy their favored status? It’s anybody’s guess. But while their payouts are in favor, make sure that the person who files your taxes (whether it’s you, or a professional you hire) knows about the 20% kicker.

Buy REITs right and you have near-perfect income investments. Not only are they tax advantaged for us as well as the firm itself, but these dividend machines are really the new blue chips for income investors.

But are they pullback-proof payouts? Yes, some are. In fact I’ve got my eye on 5 stocks that sail through epic market meltdowns like the one we saw on Monday.

And these high yield tanks pay up to 9.8%! If you’re after big, safe dividends then these are the stocks for you.

Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."

A Tax Break (Up To 20%!) For Dividend Investors? It’s True
 

Related Articles

A Tax Break (Up To 20%!) For Dividend Investors? It’s True

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email