Tax Efficiency

I figured a little reflection was the order of the day as we recently completed tax season in the US, and yes, I had to pay for the first time in years. My initial take was Trump’s tax law did no favors to those of us on fixed incomes – rather tilting the scales to benefit the wealthy and to a lesser degree the working class – though there were winners and losers across the board. In preparation for next year’s fiasco, I’ve been attempting to ascertain some of the intricacies of the changes. Previously, I opined on the foreign tax credit remaining in place. Today’s revelation potentially turns conventional wisdom on REITs on its’ head.

Sage advice has typically been – with a few exceptions – REITs are best held in tax advantaged accounts, like IRAs. The new tax law adds a few wrinkles to this concept, which Justin Law outlines nicely. The essence of his piece is that Section 199A distributions now have a 20% deduction which may warrant a review how tax advantageous REITs are in ones tax deferred versus taxable portfolio. DGI darling Realty Income (O), recently reviewed by Tom at Dividends Diversify, could well be a poster child for this type of analysis as last year’s payouts were 77.1% Section 199A and the remainder Return of Capital. The delay in this week’s post was due to some difficulty in completing a review of the fourteen REITs in my portfolio.

Two of my REITs were excluded from this analysis as I have them classified as probable sales, Uniti as their dividend cut was likely a debt covenant issue and Lamar as their IRS reporting is not straightforward (the corporate filings differ from the filings on the shareholders’ behalf). As all of my REITs are in taxable accounts, using Justin’s generic template, they were first ranked by the new Section 199A exclusion.

  1. American Tower (AMT) 99.68%
  2. EPR Properties (EPR) 95.94%
  3. Washington RE (WRE) 91.89%
  4. Outfront Media (OUT) 86.10%
  5. Iron Mountain (IRM) 83.04%

The next tier combined Qualified dividends and Cap Gains as their tax treatment is similar (and not onerous):

  1. Duke Realty (DRE) 22.59%
  2. Kimco Realty (KIM) 18.29%
  3. Prologis (PLD) 17.33%

The one tier I need to keep an eye on is the Return on Capital with Vereit (VER) 86.17% and Crown Castle (CCI) 34.39%. This part of their distribution is tax deferred until sold or the cost basis reaches 0.

The ugly tier is the Section 1250 gains with a 25% tax rate.

  1. Spirit Realty (SRC) 49.2%
  2. Spirit MTA REIT (SMTA) 21.2%

I consider this to be a one-off due to the spin of SMTA from SRC. Kimco (26.94%) could fit in this category as well although my sense is that their portfolio repositioning is the culprit, but there are opposing views to mine.

Bottom line, I’m willing – even eager – to pay taxes. Yet the rules of the game reward those able to minimize the government’s share. While the key resides in understanding the nuances of the rules, I say, “Seek the rewards and let the games begin!”

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Who Loves a Surprise?

This week has been flowing a river of surprises and I’m not talking about the nasty ones, like dividend cuts – of which I’ve had my fair share already this year. Rather I’m talking about the good surprises, the ones that put a smile on your face and lift your spirits. The ones that validate theories and reward accordingly. In this holiday shortened week, I have three to share.

Qualcomm/Apple Peace Treaty

On the eve of their dirty laundry being aired in court, the battle ended. Worldwide. Mark Hibben covers essentially all of the thought process I had when I topped off my holdings a little last July. My current thinking is that Intel was having some difficulty engineering a design that avoided patent violations and emanating minimal heat. When asked my position on this, I allowed it is a win for all three parties – QCOM in the short tern, AAPL in the mid to long term and Intel long term. My rationale? The length of the agreement is double Moore’s law providing Intel and/or Apple the runway to leapfrog 5G and focus on 6G – securing some initial patents for themselves. (Long QCOM, AAPL)

Blackstone Converts (finally …)

The long rumored conversion of Blackrock from a partnership to C-Corp will be effective July 1st. This was greeted enthusiastically by the markets, and I applaud as well. This is a positive result of Trump’s tax plan but my reasons are more the personal impact. In my portfolio I hold Blackstone in an IRA resulting in the annoyance of a K-1 as well as the possibility of Unrelated Business Taxable Income (UBTI). Going forward I’ll have the opportunity to add to this holding without looking over my shoulder at tax consequences. (Long BX)

AB Volvo (Wow!)

The one least expected actually occurred two weeks ago but I had to spend a little time digging into their numbers a little to figure out the why. The announcement from Volvo was a dividend increase to SEK 5.00 (17.65%) plus a SEK 5.00 special dividend. As they pay annually, this will hit my account this month. As the news reports in the states depicts Europe on the brink of a recession, I just had to plow through their report.

Looking at the numbers, I see a little weakness in the bus line, likely due to uncertainty around the revised NAFTA. Their otherwise record results included increases in construction, trucks and heavy equipment. Currency was a positive impact as well. As a multinational, they appear poised for continued strength in light of the Trump team’s escalating war of sanctions with the EU. Deere and Caterpillar were named last week as possible retaliatory targets. (Long VLVLY)


All in all a nice and surprising week. Here’s hoping these April showers result in a torrent of May flowers!

Views on Emergency Funds

Many posts have been penned over the years regarding the necessity of an emergency fund. In this concept, there is a broad agreement. In fact, a commonly quoted phrase is, “40% of US adults don’t have enough savings to cover a mere $400 emergency“. As with all things statistical, this is likely debatable and/or a one-sided view, but there are enough stories being shared that it is difficult to deny the plausibility. Where the views diverge, politics tend to stand in the way of a consensus. One example being Sen. Cory Booker’s (D-NJ) proposal to open a savings account at birth with government seed money. I fail to see this gaining much traction particularly if farmed out to FDIC insured institutions managed by the likes of Jamie Dimon who proved last week he was clueless in the ways to reduce wealth inequality. But I digress …

Today is tax day and based on the grumblings, appearances are that most are unhappy. Part of this is messaging, part is radical change, part is perceived promises broken … Pick a reason and you’ll find an issue, mine being an accelerating deficit backed my the ‘promise’ of an administration best illustrated as:

I would gladly pay you Tuesday for a hamburger today.

attributed to J. Wellington Wimpy, a character of E.C. Segar’s Popeye

Yes my check is grudgingly going in the mail today after spending most of the quarter paring back my regular stock investments and cutting a little on my discretionary spending. The telltale evidence of this activity is reflected in my March report showing my typical ~20% year on year dividend increases dropping mysteriously to 8.46%. My cash position is my first line of defense when emergency funds are required which is why I don’t report it as an investment position. I have found over the years in situations emergency funds are required, generally a little lead time is provided.

Contrast this with a friend who owns his own business. Over the years, we’ve discussed his lack of an emergency fund. His rationale being his ROI was better reinvesting in his business rather than holding idle cash. All well and good until the unexpected occurs. With a breakout year behind him – his business nearly doubled – he was ready to add a couple of employees and expand into another business line until he saw his tax bill. His check will be going to the government tomorrow and his business expansion is now on hold.

I guess the moral to this non-fictional tale is that the fruits of an expanding economy are only present when the growth outpaces an underlying deficit. As my friend found, reserves are a necessary evil to fuel the future. Perhaps these are isolated incidents, perhaps we’ll hear more like these in the days ahead. One can only hope that perhaps this presidential promise – unlike Wimpy’s – will be paid on Tuesday as today’s hamburger is now in hand.

Observations – r2019.4.7

Last weeks’ update mentioned the – at that time – inverted yield curve. The economists views on what this portends is all over the map from impending recession to this time is different. A couple of articles on Seeking Alpha address these concerns, with Christopher VanWert advocating a position in Consumer Staples and bonds and the self-professed contrarian Peter Schiff spinning a more ominous conclusion. My take? It’s always wise to be aware of all possibilities when setting a course. Banks – moreso the community banks – will bear the brunt of any prolonged inversion setting the stage for potential further consolidation. It might be too late for a meaningful increase in Staples as they’ve become rather pricey of late. Bonds may be an alternative but still carry a premium to what I’m willing to pay. Not mentioned are utilities as they have a perceived sensitivity to interest rates. What is often overlooked is that regulated utilities have the ability to pass this through to their customers, albeit with a delay. My action items will – first and foremost – address the speculative portion of my portfolio to de-risk to a degree.

It’s a little gratifying when other bloggers see a social issue in a similar vein, as in Bert’s piece on stock buybacks. Other issues gaining traction – outside my rants last month – found their way over to Dividend Ninja with his take on the low unemployment rate. As he is Canadian, the US centric version would also have to consider the acceleration of expensing as part of last year’s tax plan – the result being companies getting a tax break to increase automation to increase throughput (or reduce headcount). Also of note is his piece on dividend cuts. I’ll acknowledge cuts may be a sign of proactive management but it is easily a sign of mismanagement – especially when triggered by debt covenants. Most investors don’t have the time or energy to sort through the issues – hence the common rule of thumb, Sell on the news.

This week will be decision time – did I allow enough cash to accumulate to pay the tax man (or woman). I scaled my reinvestment back during the quarter so we’ll see if I have to sell a little or not. Interestingly, an analyst on CNBC last week attributed the slow-down in new car sales to the surprises in store with the tax plan. That has me wondering if that could translate into the housing market OR if that’s why the Trump team is so driven for the Fed to cut rates?

As always, comments are welcome and have a good week!