This post could also be titled ‘how Dumpling is dumb and misunderstanding something’ but I don’t think so. But please, if I’m wrong TELL ME IMMEDIATELY! I would really appreciate it. Because if I’m wrong it’s going to mean a big tax hit in the future, which I’d rather avoid.
One component of my wealth plan includes direct investing in REITs. Or, more specifically, Annally Capital Management (NLY), as a wealth driver. The big reason for REIT investing is that they’re required to return the majority of their taxable income directly to shareholders. So their dividend rates are very large. Annally is currently about 11%. This is some nice big juicy growth.
The Negatives of REITs
There are a few negatives to REIT dividends, however. First is that they’re not qualified dividends, so they’re taxed as ordinary income. Second, because most of their taxable income is returned to shareholders, there is little share price appreciation. Also (and again because it’s the taxable INCOME that’s returned) there’s a tendency in REITs to maximize structural inefficiency and pay their leadership teams too much. So RIETs can be even more of a management cash grab than other corporations. Third, the share price generally trades in a narrow band (see the appreciation point above) so any gains/losses are fairly marginal – your stock isn’t going to double and make you rich, even in the fullness of time. Finally, RIETs can be expected to be challenged in a rising rate environment (which we’re in). So, REITs are a fairly high-risk investment, all told.
Dividends: Why REITs Make Cents (wakka wakka)
The positive is really just the dividend growth. Like I said, NLY is currently paying about 11%, and I’m not aware of much with that kind of consistent return (note: I said consistent, not guaranteed or low risk, or anything like that, or close to that, at all…at all). If you combine this with DRIP (dividend re-investing plan) investing, this can be very powerful. I’ll explain: as part of my brokerage account, I have NLY shares which I purchased in June of 2015, and I’ve been re-investing the dividends since then. I bought 100 shares at $9.93 and a $7 commission for a total of $993.72. Since that time, and with no additional cash put in on my part, that position has grown to 143.5 shares at about $10.69 (tee-hee) per share – a total of about $1535. Granted, the dividend income growth has been taxed at my regular income rate in that time, but that seems pretty negligible. In 2017 for example, dividend income was $148.71 – so I’m not jumping myself into another bracket with this one.
Mah Strategery
Where the strategy comes in: Ok, so here’s the part I might be screwing up. My theory is that this is a great way for me to build up my cash position and do one of two things:
- OPTION ONE: I can just use the dividends as part of my income in FI. Using today’s numbers, a $100,000 position would put out $11,240 per year in dividends, which is $936 per month. Cash management would be a little more difficult as I’d only be getting ‘paid’ once every three months, but that’s a decent chunk of change that I could use to fill gaps in my other retirement income sources. Using the 4% rule with more traditional index investing I would need to save $281,000 to generate the same monthly income. Which seems…unlikely.
- OPTION TWO: Because the share price trades in a relatively narrow band, this seems like a good stock to loss harvest. In the past few years, my dividend purchases have bought shares at anywhere from $9.93 to $11.98 – current price as I said above is $10.69. So I could when needed sell the dividend shares bought at higher values at a loss in order to shelter other capital gains, allowing me to regain use of those funds over time. Also, because I’ve already made my return (the 11% dividend) I don’t really need to care about appreciation at all. It’s much like my rental real estate investments – I’m buying for cash flow.
In any case, that’s my thought on the above. If I’m wrong, pretty please tell me so. I’d really appreciate it (especially if it comes before I completely nerf something up).
