UnThreaded | Threaded | Whole Thread (12) | Ignore Thread Prev | Next
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: of 8880  
Subject: Re: RAI - Dividends Date: 12/12/2012 3:11 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 8
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.
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (12) | Ignore Thread Prev | Next

Announcements

Motley Fool Income Investor
Are you a dividend-savvy investor? Check out our Income Investor newsletter.
Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Post of the Day:
Value Hounds

Considerable Headwinds for Profire Energy?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement