Get Higher Yields And Maybe Some Tax Benefits
Certain types of stocks pay higher yields than typical dividend stocks.
- Closed-End Funds
- Real Estate Investment Trusts (REIT)
- Business Development Companies (BDC)
- Master Limited Partnerships (MLP)
- Preferred Stocks
It is possible for a closed-end fund to sell for less or more than the net asset value(NAV).
When researching a closed-end fund, you always want to know if a fund is trading at a discount or premium to its net asset value.
- Premium = the price an investor pays that is higher than the actual value of the fund’s assets.
- Discount = the price an investor pays that is lower than the actual value of the fund’s assets.
Two places that will show information on the NAVs and other data can be found at the Closed-End Fund Association website, or Morningstar.
Book Value Per Share = the amount the company would be worth if its business were liquidated. Calculate easily by dividing shareholder equity by the number of shares outstanding.
The best scenario is when you buy a fund at a discount, the NAV goes up, and the price eventually closes that discount to trade at a premium.
Example CEFs mentioned in the book:
- DWS Municipal Income Trust (KTF)
- Liberty All-Star Growth Fund (ASG)
Check the funds out carefully before investing.
- Are the assets distressed?
- Is the dividend sustainable?
- Will the fund company remain solvent?
Master Limited Partnerships (MLP):
Here is the Investopedia page on MLPs for an explanation.
An MLP is a company with a special structure that bypasses corporate taxes because it passes along nearly all of its profits to unit holders in the form of a distribution.
Note that an MLPs have units, not shares, and pay distributions, not dividends. There are important differences between the two from a tax perspective.
Read the investor relations page of the website of any MLP you are considering investing in, to get a thorough understanding of the way the company pays distributions.
A lot of MLPs are energy companies with oil and gas pipelines.
Any decrease in earnings can result in a dividend cut. The distribution is usually not as stable as a strong dividend payer such as The Clorox Company.
Plains All American Pipeline (NYSE: PAA) has raised its distribution for 13 consecutive years (at time of publication).
TC Pipelines (NYSE: TCP) has raised its distribution for 15 consecutive years (at time of publication).
An MLP can be good for estate planning because the heirs inherit the units at the market price at the time of death. It allows the unit holder to collect tax deferred income for years.
Real Estate Investment Trusts (REITs):
Here is the Investopedia page on REITs for an explanation.
Example: Tanger Factory Outlet Centers (NYSE: TCP) develops and operates shopping centers, has raised its dividend every year since 1993 (at time of publication).
Business Development Companies (BDCs):
Here is the Investopedia page on BDCs for an explanation.
A BDC is a publicly traded private equity investment firm. They can be somewhat high-risk but also offer high dividend yields.
Example: New Mountain Finance Company (Nasdaq: NMFC)
Example: Main Street Capital Corporation (Nasdaq: MAIN)
It is usually best if you can find a high yielding BDC trading below NAV.
Do your homework on the company and see how consistent the dividend has been, and try to determine if it will be sustainable.
A BDC must pass at least 90% of earnings to shareholders.
BDC can be volatile because they usually invest in one sector.
Combination of a stock and bond.
Cumulative preferred shareholders get dividends stored for them even in years when companies did not pay dividends.
Issued at par value and the dividend is usually fixed.
Financial institutions make up about 85% of all preferred stock holders.