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Author: vjoco Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8821  
Subject: RAI - Dividends Date: 12/12/2012 10:57 AM
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I have been retired since 2000. In 2000 I bought 1000 RAI for $18 and change. I have held it since. There have been 2 splits. I now own 4000 shares at $4+. Today's price is $42+. That's about $38 caption gain.

Next, I receive $2360 quarterly which is taxable at 15%. What worries me is the probable change in the treatment of dividends and capital gains in 2013.

I am considering selling 2000 shares for a capital gain of $76,000. I am considering investing that money in "High Yield, Tax Free Funds". I will have a large tax hit for 2012, but I feel 15% beats 23+%. And I will reduce my taxable dividend by 1/2.

Is this a good idea? If so, should I bite the bullet and sell all 4000 shares, pay the 15% tax and invest all the $ in those monthly non-taxable funds?

I would really appreciate some advice,

VJOCO
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Author: NozRydr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7730 of 8821
Subject: Re: RAI - Dividends Date: 12/12/2012 3:01 PM
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RAI pays 5.48% according to a quick look at Etrade.

What's the underlying concern and goal? Diversification? Income security?

Have you been planning to sell your RAI anyway?

Since you're looking at "High Yield, Tax Free Funds" it sounds like you plan to continue taking retirement income from this money.

Depending on your goals there's more options to consider than just sell or hold. Just a couple other options that come to mind off the cuff:

You could sell RAI, pay cap gains, rebuy RAI, collect 15% less dividend income for now and have a higher basis if you mean to sell RAI in the future.

You could do nothing, keep the income stream you have,pass those shares along to your heirs (if you care to) at a stepped up basis.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7731 of 8821
Subject: Re: RAI - Dividends Date: 12/12/2012 3:11 PM
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Welcome, vjoco. We're glad you could join us.

No one really knows what Congress will end up doing. Still you clearly have an opportunity to pay your capital gains taxes at the 15% rate, and most expect the rate next year to be higher--probably 20% to the full ordinary income tax rate. I doubt that you are paying the 35% they talk about as the top rate, but if you are paying 15% capital gains rate, you are probably in the 25% bracket. That number ranges in your risk. (And don't forget the effect of state and local income tax too.)

RAI is currently paying $2.36/share, or $9440/yr on your 4000 shares. I like Nuvene Select Quality Muni bond fund, a closed end tax free bond fund, ticker NQS (but I also use a similar one from Blackrock, ticker BLE). These are leveraged funds which borrow against their bond holdings at short term interest rates and then buy more bonds to increase their income. NQS is currently paying $0.08/mo or $0.96/yr = 5.85% mostly tax free. Recently the IRS has decided that the income from their leverage is not tax free. So its partially taxable.

Some think the leveraged funds are risky. My experience is that income depends on the spread between short and long term interest rates. When the yield curve inverts, their yield gets trimmed a bit, but it is not that they go bankrupt.

If you sold your RAI and bought NQS, your income would be $10062. Tax exempt mutual funds could also come under fire as part of the fiscal cliff negotiations, but the chaos that removing the exemption would cause makes that very unlikely in my judgement.

If you sold your RAI at $43 (yielding $172,000), your gain of $154K would result in a tax liability of $23K. If you paid the taxes out of the $172K and invested the rest in NQS, your income would be $8716. That compares with $8040 after tax from your 4000 shares of RAI. So this looks like a reasonable move to increase your net income and trim your tax liability a bit.

Your main risk here is that muni bonds are selling for near their highs due to very low interest rates. As interest rates rise, the share price will probably fall. That can happen with dividend stocks too. It is difficult to avoid that risk when investing for income.

I think this change is OK. But I would hope you have other investments too to maintain some diversification if something goes wrong. NQS is a reasonable choice as part of a diversified portfolio; it is not a good place for the rent money.

And note if you are on Medicare, both capital gains and tax free income count toward the MAGI, which determines if you pay extra high income premiums of up to nearly $3000/yr. You might want to factor this added cost into your calculations too.

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Author: vjoco Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7732 of 8821
Subject: Re: RAI - Dividends Date: 12/12/2012 4:44 PM
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Thanks pauleckler! Your reply is very helpful. I do have around $30000 in other taxable income. I just thought I might start with RAI as it's my biggest cap-gain stock.

But, I am not the most savvy person when it comes to stocks, funds options etc. Your last paragraph: "And note if you are on Medicare, both capital gains and tax free income count toward the MAGI, which determines if you pay extra high income premiums of up to nearly $3000/yr. You might want to factor this added cost into your calculations too.", Went over my head. I am on medicare, but I don't know what MAGI means. I'm sure I need to know what this is, so please clue me in!

Also, I have never tried "Options". Is this a safe idea for one who only owns stocks?

Thanks,

VJOCO

PS:

I'm from Texas, so no state or local taxes. ;O)

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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7733 of 8821
Subject: Re: RAI - Dividends Date: 12/12/2012 5:03 PM
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Also, I have never tried "Options". Is this a safe idea for one who only owns stocks?

Not unless you REALLY know what you're doing and then it's chancy.

Buying and selling (trading) stocks is like betting at the casino; lots of fun and excitement.

I prefer to buy dividend paying stocks, hold on to them and collect the dividends. Here's a list to choose from.

Below is a DRIP site that lists U.S. Companies with 25+ Straight Years Higher Dividends. DRIPing them is fun but not necessary.

The DRiP Investing Resource Center
U.S. Dividend Champions
Excel Spreadsheet or PDF Format Updated monthly
http://dripinvesting.org/Tools/Tools.asp

Here are some of my favorites.

PNY (Been paying a dividend for over 25 years.)

WTR (A fast growing water utility.)

SO (Been paying a dividend for over 60 years.)

WRE (Been paying a dividend for 38 years.)
A REIT centered in Washington DC, it'll have renters as long as we have a government.

Desert (also from Texas) Dave

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7734 of 8821
Subject: Re: RAI - Dividends Date: 12/12/2012 5:08 PM
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MAGI is the sum of your AGI (adjusted gross income) from your income tax form and income from tax exempt bonds. The best source of information is this Social Security brochure--

http://www.socialsecurity.gov/pubs/10536.html#a0=5

If you are married filing a joint return, the bite is small, but if you are single, $170K in income will cost you.

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Author: Ga1Dawg Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7735 of 8821
Subject: Re: RAI - Dividends Date: 12/12/2012 8:25 PM
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WRE (Been paying a dividend for 38 years.)
A REIT centered in Washington DC, it'll have renters as long as we have a government.
***********************
DD, WRE has recently cut the dividend. Has your opinion of WRE changed?

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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7736 of 8821
Subject: Re: RAI - Dividends Date: 12/13/2012 12:21 AM
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WRE (Been paying a dividend for 38 years.)
A REIT centered in Washington DC, it'll have renters as long as we have a government.
***********************
DD, WRE has recently cut the dividend. Has your opinion of WRE changed?


No, but thanks for the info.
I'll hold on to my WRE shares for now.
I did a quick check and couldn't find a reason for the price decline.
Got any ideas about what happened?

http://www.google.com/finance?q=NYSE%3AWRE&ei=tmPJULCxFI...

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Author: Ga1Dawg Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7737 of 8821
Subject: Re: RAI - Dividends Date: 12/13/2012 12:39 PM
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WREW announced an ex-dividend date of December 12, 2012 and a cash dividend payment of $0.3 per share scheduled for December 31, 2012?

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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7738 of 8821
Subject: Re: RAI - Dividends Date: 12/13/2012 2:04 PM
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WREW announced an ex-dividend date of December 12, 2012 and a cash dividend payment of $0.3 per share scheduled for December 31, 2012?

WREW?

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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7739 of 8821
Subject: Re: RAI - Dividends Date: 12/13/2012 3:06 PM
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WRE has recently cut the dividend.


Snip:

"Washington REIT has slashed its quarterly dividend by more than half. The payout was reduced from 4338¢ to 30¢, or an annualized rate of $1.20. This was unexpected, since WRE was one of the few operators in the REIT sector that did not lower its distribution during the last recession. A desire to maintain the company's fiscal discipline and financial strength was the primary reason cited for the move."

Snip:

"Washington REIT's dividend coverage has thinned significantly in recent years, with the payout consuming 90% to 95% of cash flow, versus a historical average of roughly 80%"

—Value Line.


Washington REIT would have made a disappointing long-term investment. If you'd bought shares at the median price for the year in 2002 (ten years ago) and held your shares you'd be looking at about the same share price today.

Also, the dividend distribution is now south of the amount the company was paying in 2002. Then the annual distribution was $1.39.

kelbon

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Author: Ga1Dawg Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7741 of 8821
Subject: Re: RAI - Dividends Date: 12/14/2012 11:36 AM
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Sorry WRE :-{

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