Welcome to the Friday mailbag edition of Intelligent Income Daily.
Every week, I tackle some of the most pressing questions from your fellow readers.
While we can’t give personalized investment advice, my team and I read every piece of feedback that comes in. And we’ll share our take on the biggest issues on your minds.
If you have any questions or comments, please write to us here.
Now, let’s dive in…
You’ve talked about REIT (real estate investment trust) cash dividend payouts and referred to the figures of 60-70% as strong and favorable. I thought REITs had to pay out 90%. Are you referring to a different calculation? Please advise on the difference. – Samuel H.
Brad’s response: Thanks for writing in, Samuel. When it comes to REITs, keep in mind that the 90% rule is a law. To qualify as a REIT, it requires them to pay out at least 90% of their taxable income in any given year. Most REITs pay out close to 100% of their taxable income.
You may be confusing that with the payout ratio, which is the dividend payout divided by earnings. In REIT terminology, that’s funds from operations (FFO).
As an example, assume XYZ REIT is generating $1 per share in quarterly FFO, and the dividend is $0.60 per share. This would mean the payout ratio is 60%, which provides a safe cushion, or margin of safety, with regard to the dividend.
So, the difference is that 90% is referencing taxable income and the favorable 60% to 70% payout is referring to funds from operations.
Recently, Kiplinger’s Personal Finance listed Stag Industrial (STAG) as one of ten or so REITs suggested for persistent positive performance. After perusing their financial metrics, I noticed that their payout ratio is beyond 110%. As a monthly dividend distributor, how could this possibly be sustainable? – Rick B.
Brad’s response: Great question. STAG is one of my favorite REITs. And over the years, the company has worked hard to not only grow its dividend, but also to reduce its payout ratio.
I created the chart below to illustrate how STAG has reduced its payout ratio from 92% to around 76%. We use adjusted funds from operation (AFFO) per share. That adjustment accounts for recurring expenses required to maintain a property.
As you can see, STAG’s dividend is much safer today than when the company listed shares back in 2011.
Hello. How does an individual who invests in the Schwab ETF (SCHD) provide the yearly required information regarding income on the 1040 tax return? Thank you. – Liat K.
Brad’s response: SCHD is a straightforward, low-cost exchange-traded fund (ETF) that yields nearly 4%, one of the highest yields among blue-chip ETFs. It tracks an index focused on the quality and sustainability of dividends and invests in stocks selected for fundamental strength relative to their peers, based on financial ratios.
Consensus estimates show SCHD is expected to grow 8.5% annually. That’s on par with the S&P 500 and dividend aristocrats, but it offers a far higher starting yield.
As for the taxable aspect of your question, it’s important to note we’re not tax specialists and cannot give advice on that. For questions related to your specific situation, please consult to a tax professional.
But as a general rule, dividends and capital gains distributions received from an ETF will generally be taxed as ordinary income or capital gains. Unless you’re investing through an IRA, 401(k), or other tax-advantaged account, in which case you may be taxed later, upon withdrawal of your investment from such account.
Hello, Brad Thomas! I enjoyed your article on SWANs. I will follow STAG. I am wondering what you think about Annaly Capital Management (NLY), AGNC Investment (AGNC), Two Harbors Investment (TWO), Realty Income (O), Armour Residential REIT (ARR), New York Mortgage Trust (NYMT), and others.
I am curious to know whether any of these make up part of your portfolio. I do appreciate your time and knowledge sharing. Thank you. Best wishes to you. – Pia L.
Brad’s response: First off, thank you for being part of our dividend-focused community. Our team is extremely excited with the growth of our newsletter.
Regarding NLY, AGNC, TWO, ARR, and NYMT, we’re avoiding these REITs because they are residential mortgage REITs and much more volatile, primarily due to their leverage.
Alternatively, Realty Income (O) is a terrific REIT and one of my favorite holdings in our Intelligent Income Investor portfolio. It’s a terrific buy right now considering the company has two wide moat advantages:
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Scale advantage – over 11,000 rent checks coming in each month.
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And cost of capital advantage – fortress (A-rated) balance sheet.
If you decide to buy Realty Income, you’ll add an ultra-SWAN to your portfolio.
And if you’re interested in other monthly and quarterly dividend-paying recommendations, click here to learn how to access our full Intelligent Income Investor model portfolio.
That’s all for today. If you have any questions you’d like me to address in these pages, send me an email here.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily