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In last week’s column, I promised to talk more about some of the questions I was asked at the Orlando MoneyShow — both during my live presentation as well as in private conversations during the event
Of course, I don’t want to make it sound like I was simply doling out answers. In fact, I learned a lot from show attendees, too.
One couple shared with me their income strategy based on agency bonds. Others gave me opinions on rare earth metals, additional problems with Social Security that I should look into, forecasts for energy prices, and a whole lot more.
Heck, even some questions led me to new information!
For example, one reader came up to me with an interesting situation. He works for Altria and has accumulated a substantial number of shares in his retirement account. And he wondered whether he could receive dividend payments penalty-free from other stocks in his retirement portfolio.
“Wait a minute,” I said. “What do you mean? You aren’t retired yet, are you? How are you receiving ANY dividends from your plan without paying a penalty?”
He didn’t know, but said he had been receiving his Altria dividend payments penalty-free from his account and using the proceeds to pay for his daughter’s college. He had been asking experts at the show whether other stocks in his plans could have the same benefit but nobody could offer any advice.
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Frankly, I had never heard of any penalty-free distributions from a retirement plan like this, either — other than hardship withdrawals, loans, or post-retirement qualified distributions.
But after some research I came across a provision that allows employee stock ownership plans to distribute dividends directly to employees, circumventing the 10 percent early-withdrawal penalty.
So I’m grateful for the question because I discovered something I didn’t know previously!
Of course, to answer the original question — no, you cannot directly receive dividends from other investments in retirement accounts without paying the regular penalties and taxes. Sorry.
Now, sticking with the retirement theme, here’s another great question I received during my live presentation …
“Are All of Your Dividend Recommendations
Suitable for Tax-Sheltered Retirement Accounts?”
As you probably know, 401(k) plans and Individual Retirement Accounts (IRAs) are great wealth-building vehicles precisely because they allow you to contribute a portion of your income before taxes are taken out … as well as giving you the opportunity to increase those funds for decades before you have to pay any taxes on the proceeds.
And typically speaking, I think dividend stocks are terrific investments to stuff into your retirement accounts. For many of the reasons, see my column from last week.
However, there is at least one big exception: Master Limited Partnerships (MLPs).
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| While partnerships in oil pipelines can hand you solid income, they’re best held in taxable accounts. |
Because of the way these companies are structured, a good portion of their dividend distributions are already tax-deferred, and holding them in tax-sheltered accounts can create a big headache come tax time for all but the smallest positions.
Speaking of more exotic dividend-paying investments, one audience member asked me …
“What’s the Situation with Canadian Royalty Trusts?
Are You Recommending Any Right Now?”
It’s another great question … because Canadian Royalty Trusts, or CANROYs, have been in legal limbo for quite some time now. Let me explain …
These Canadian natural-resource-focused companies operate under a special structure, much like MLPs, REITs, and other investments do here in the U.S. Essentially, the Canadian government allows them to pass along the bulk of their cash flow to investors and avoid corporate income taxes in the process.
However, recent legislation is aimed at removing that benefit in the near future, and investors have been running from CANROYs ever since the original announcement hit the wires.
For a long time, I avoided the entire lot of CANROYs precisely because the uncertainty was so high, too. Then I took another look for my Dividend Superstars subscribers once the dust had settled.
My conclusion was (and still is) that a handful of CANROYs have now made adequate preparations to continue paying out fat dividends whether the legal changes ultimately happen or not. And I’m currently recommending my favorite of the bunch in Dividend Superstars at the moment.
So the short answer is that this is a good time to take another look at the CANROYs if you’ve been avoiding them up until now. Just be sure you stick to ones that have very defined plans in place for possible legislation.
That leads me to one last question that I was asked at least three separate times during the show …
“What do you think about mortgage REITs like Annaly Capital Management?”
If you’re getting the sense that investors are very interested in special categories of higher-yielding stocks right now … you’re right! And Real Estate Investment Trusts (REITs) have traditionally been a very popular choice for above-average yields.
Like other REITs, Annaly Capital Management (NYSE: NLY) runs real estate operations and pays out the lion’s share of its profits to investors as dividends. But instead of owning commercial properties or other physical assets, it manages a portfolio of asset-backed securities — principally, residential mortgages.
Thus, the real question when it comes to companies like Annaly is whether or not you think our country’s mortgage woes have been solved.
Like other analysts at Weiss, I think housing has at least stabilized at the moment. But I’m not ruling out the possibility of further woes in the mortgage market, either.
Sure, NLY’s current annual yield of about 17% looks mighty tempting. But the shares have already rebounded sharply and I consider them extremely speculative at current prices … along with most other REITs right now.
Bottom line: I’d rather stick to more conservative investments for the bulk of an income portfolio, and seek more aggressive, higher-yielding opportunities in places unrelated to real estate or mortgages at the moment. The aforementioned MLPs and CANROYs are both better choices.
Best wishes,
Nilus
P.S. One other question I’ve been getting is whether Weiss Research is doing anything to help out the victims of the earthquake in Haiti. The answer is a resounding “yes!” We’ve teamed up with the Red Cross to help bring in much-needed donations. If you’d like to contribute, click here now.
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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