I have savings which I mostly have funnelled into various income generating securities in a taxable account. This is mostly preferred stocks (PGF and individual preferred issuances), high dividend equities that I believe are good values, covered call strategy ETF’s (ETY), structured credit (i.e. ECC, GOF, OXLC, CLNC) and ultra short duration ETF’s. I have always known there would be tax liabilities but it beats sitting on cash and earning nothing. These savings have grown to the point where taxes are becoming quite significant and I need to be managing these better. I have focused too much on the securities themselves and not tax efficiency which I think is not smart on my end.
(1) What exactly constitutes a qualified dividend vs. an ordinary dividend?
(2) Any other tax shields I can use? My 401k and Roth accounts are maxed out each year so its not an option.
(3) I have thought about real estate investments, but I hate the lack of liquidity, transaction costs and I’m pessimistic about long-term real estate values in the city where I make a living. I have ruled this option out.
I am aware investing in equities and deferring potential capital gains years out is ideal as opposed to paying taxes on dividends and coupons each year, but I am not comfortable investing in a lot of equities right now b/c I think the valuations are stretched. I don’t want my liquidity tied upon into stocks. (~40% of my taxable account is in MINT, GSY, VCSH, ultra low duration ETFs that pay +3% which I hope to turn around into stocks at cheaper valuations at some point in the future). Deferring capital gains on equities for better tax treatment is not on my menu right now.
Hmm. Seems like you have missed out by not investing in equities this whole time. Valuations should naturally look more “expensive” in a <3% interest rate environment than a >6% interest rate environment… Equities should give you better returns than what you currently have, but you don’t want the price risk.
For what it is worth, there are studies that show “value equities” have essentially yielded no premium over other equities over the past 30 years.
The best tax shelter available to you is real estate. Since you can mark off depreciation expense, all your income will likely be tax free. Furthermore, you will usually be able to roll lots of the capital gains basis if you sell the asset. However, you don’t want to deal with illiquidity.
To your question about qualified dividends - almost every dividend paid by US companies is qualified. Unqualified dividends are usually only special cases, like in REITs.
One thing you have not mentioned in municipal bond funds, for tax savings. I’ve done some time consuming research, and the best ones that I have selected are HYD, NZF, and maybe HYMB. However, these are most likely only worthwhile if you are in a high tax bracket.
Other than that, tax loss harvesting is a good way to save on taxes. If you have a dispersed portfolio, you can usually rebalance over time and eliminate some portion of capital gains.
Logically, it seems like Buy the Dip can’t lose. If you know when you are at a bottom, you can always buy at the cheapest price relative to the all-time highs in that period. However, if you actually run this strategy you will see that Buy the Dip underperforms DCA over 70% of the time. This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging.
Thanks. My retirement accounts are target date and equity heavy so I’ve not missed returns for retirement, but my taxable account has been these income-oriented investments mainly b/c I’ve wanted liquidity for various reasons (my previous job/bonus comp have exceptionally correlated with the health of financial markets) and I was worried about (i) losing my job and (ii) losing a lot of my liquid savings at the same time. While equities have done very well, my structured credit investments have yielded 10-14% annually so my returns have been pretty decent. My largest pref investment is a 10% coupon in CPE which ain’t too shabby, either, and I think it is a well-covered investment. This last week I’ve shifted a lot of riskier income-oriented funds (CLO equity) to MINT and GSY. The last few years I’ve returned 6-7% from this portfolio but I do have to pay taxes on these annually which sucks, and as I realized in December, this portfolio is pretty well correlated with equity markets even if I believe less volatile.
I live in Chicago and while its a great city that I love, long-term demographic trends are going to be poor and I don’t want to be too long real estate here. I agree it’s a great tax shelter but in this city I’m going to only face rising property taxes and migration outflows slowly over time so I don’t want real estate. Maybe if I lived in Nashville, but not Chicago.
I want to get more long equities at some point but I’m not comfortable with many valuations right now. I know I can’t time markets but for the first time in a decade I can make 3% in an ultrashort duration fund so I’m more comfortable doing so.
Thank you Slim Charles (great name) and rawraw for your help. I appreciate the help. I think I’m pretty much stuck on paying taxes on my income in this account.
FYI rawraw, I recently sold BANX which you recommended a few years back. This thing gave me a really nice div yield and some price appreciation, all while being very stable (until recently). 15% of this fund is a freaking ETF and 30% of it is in a community bank pref CLO with a low yield on a risk-adjusted basis in my opinion. There’s just not enough community bank subordinated loans and pref investments out there to invest in apparently.