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investing101

All about making a living off dividends

Passive income has become a big topic now a days. As people become more busy and stressed, they are trying to search for alternate sources of income. Something they can earn passively. Making a living off dividends is one of the best ways to take part in investing and growing your wealth. Be warned this is not a get rich easy scheme.

Living off dividends passive income strategy requires you to put a lot of time and effort over a long term to be successful. I wanted to break down some myths about dividend investing with facts and explain how you can be successful in this strategy.

Let’s get started!

What is a Dividend?

When any public company makes a profit any year, it needs to decide what to do with its profit. This is usually called the question of capital allocation. A company can:

Invest back in its business in R&D, in operations to grow more and make more profit next year.
Invest in acquiring a new company and boost its return on invested capital.
Return capital to shareholders in form of buying back stocks thereby boosting EPS(Earnings Per Share) or by giving dividends.

A company need not only do 1 or 2 of the above-mentioned things. They can employ all 3 strategies every year. That third point above is where dividend investing comes into picture. Dividend is essentially your share of profit in a company in which you own stock. When you purchase a stock of a company you are part owner in that company. You have the right to vote for the board of directors in the company. By voting them in, you expect them to make sensible decisions on the above 3 criteria. So, the executives in the company every year/quarter announce if they will have a dividend or not. They announce the following dates too which are important to know when investing in such stocks:

Record Date	Date on which the broker will check to look who all own the stock that day to calculate how much dividend owner of stock on record will get.
Ex-Dividend Date	Once you buy a stock it takes couple of days for the transaction to settle and for you to be a shareholder in the company. So, this is the date before which you need to buy the stock in your brokerage, for you to show up as the owner of the said stock by record date. This is usually 1-3 days before record date.
Payment date	That’s the date on which you will get the payment of dividends in cash/stock in your account as per the company’s policy. Mostly its cash and you can re-invest it automatically or use it for buying other stocks.

Why Dividends?

Dividends are actual income (Passive Income)

No doubt capital gains via price appreciation of a stock are good. However, you need to sell the stock to realize the gain. With dividends you get a part in the profits of the company without selling the stock. You can choose to reinvest it again to get more dividends next year. Over long term, you will see your dividends compound and you would see yourself living off dividend income alone. Again mind you this can easily take from 10-25 years depending on how much you invest every year. Nothing in life is easy and dividend investing needs time and effort on your side, but its definitely possible. I know a few people already living off dividends in retirement.

Dividends force executives to be more sensible

Importance of this cannot be understated. Sometimes management makes foolish decisions to acquire companies out of their circle of competence. They spend a lot of money and years down the line, we don’t see any returns at all. A lot of such acquisitions must be written off in balance sheet in form of goodwill impairment. Having a dividend policy forces the management to make more sensible/disciplined decisions. This leads to better returns for you as an owner in the company.

Risk Management from volatility

Dividend stocks are a way to lower the risks arising from volatility in daily/monthly/yearly stock movements. Since the owners of dividend stocks get their dividends as income every year, they are more open to not selling the stock in tough times and giving the company a chance to tackle problems at hand. Many companies that have an established dividend policy also have a large base of owners who are looking for those dividends to come in like clock work and they are more forgiving of the performance of the overall appreciation of stock.

Dividends taxed favorably

Dividends are taxed favorably under the current tax scheme. You pay lesser taxes for qualified dividends as compared to your taxes on income.

Dividends Drive overall Stock returns too!

There is a lot of data and analysis done that proves companies that pay dividends outperform companies that don’t pay dividends over long periods of time. Look at this chart below for a comparison between the index of dividend stocks vs non div paying stocks (courtesy Hartford Funds):

As you can see in the last 4-5 decades dividend growth stocks have outperformed the whole market. Check out some articles from Hartford Funds and Raymond James which go on to give way more data on how over the long term, dividend stocks outperform non dividend paying stocks.

Dividend Yield Investing vs Dividend Growth Investing

Dividend yield is basically ratio of total dividends given out per year by the price of the stock. For e.g. if AT&T (T) pays out 2.00$ every year and its current price is 31.62$ then the yield is 6.32%. So, it might make sense to buy the stocks yielding the highest to get more income. However, do not go chasing the yield. Usually stocks with 10-20% dividends are highly risky and prone to getting dividends cut soon. Dividend Yield Investing (DYI) focuses on having more income from your stocks. Usually people who are close to retiring and have a more conservative approach prefer dividend yield investing. Usually if you look at high yield companies they do not increase the dividends by huge amount every year. In case of AT&T its usually 1-2% per year.

Total Return= Dividend starting Yield (6.32%) + increase of 2% in dividend payout every year + capital appreciation

Meaning you get 6.32% return every year using dividends alone. I haven’t even included any stock price appreciation yet in the above calculation. Neither did i include dividend raises, nor did you sell any stocks to get this money in your pocket. See the magic of dividends?

People who are younger and have much more time to compound money usually should do Dividend Growth Investing(DGI). This is where you forgo the initial high dividend yield in favor of higher dividend increases every year. E.g. Starbucks (SBUX) yield of about 2.79% at price of 51.62$ as of 15-JUL 2018. However, if you notice the annual rate of increase of dividend over the last 5 years, its almost 20-25% annually!

Total Return = Dividend starting Yield (2.16%) + 20% increase in dividends every year + capital appreciation

Just as Einstein mentioned, compounding is the 8^th wonder of world. Real magic happens if you re-invest these dividends to buy more of the same stocks. Since more stocks next year would result in even more dividends. This is where dividend growth investing also leaves dividend yield investing behind. If you continue to Dividend Re-Investment Program (DRIP) and reinvest dividends its easily possible you will have a much higher yield in 8-10 years for your DGI stock as compared to the DYI stock.

Let’s look at Starbucks and AT&T stocks as of 15^th Jul 2018:

You can see the starting and ending yield on cost in these 2 investments above. Over time a DGI stock usually performs and returns way more money. However, it obviously comes with its risk. At&T has many years of history in successfully paying dividends. Starbucks has only 5-6 years of history paying dividends. But there are many indicators and fundamentals to look for when choosing such stocks.

Case against Dividend Investing

Dividend payout = Lower share price

This is true, every time a distribution gets paid out the price of the stock goes down by equivalent value on the payout date. People argue what’s the point of getting dividends. However, that’s just being very short term in thinking. If you plan on holding such stocks forever and you should, how should a short-term blip on payout date matter at all? Over the long term, company grows and so does the stock price!

Dividend paying companies grow less

Another argument is only companies that have stopped growing or have no use of cash, pay out dividends. Such companies cannot efficiently allocate capital and so choose to give out dividends. So capital appreciation on the stock gets hit. You won’t be able to make much off of capital gains on stock. However as mentioned earlier, good dividend stocks bought at correct price have great potential to provide above average returns.

Preferential tax treatment for dividends can change

This is a minor threat. Currently you pay less taxes on dividends as compared to short term capital gains on stock sales. However, nobody knows the future, and this can change at any time. When that happens, its possible such stocks can fall out of favor.

Dividend stocks make you miss out on fast growing industries

Usually most dividend stocks belong to consumer cyclical, consumer staples industries. Companies that have very stable fixed stream of income. Some financial companies etc. Argument is that tech stocks which grow the fastest usually never pay dividends. So, if you do not buy such stocks you are missing out on the best growing stocks in the market. However, there are big tech companies like Microsoft, Apple, Intel, Cisco etc. that pay dividends and increase them at a fast rate. Secondly, I never said to not have any non-dividend paying stock in your portfolio. Ideally you should have a balanced portfolio of stocks, bonds, REIT’s as mentioned in my earlier article on portfolio building.

Dividends are not guaranteed

This is true. In the recent past companies like Kinder Morgan Inc (KMI) and General Electric (GE) have cut their dividends. They were considered dividend stalwarts but fell into a lot of trouble and had no choice but to cut dividends. However, for such companies there were always signs. Things like payout ratio which was increasing, financial health was deteriorating, too much debt, not being shareholder friendly etc. But most of these signs were identifiable.

How much do you need for living off dividends?

There is no fixed answer to this question. You know how much you spend annually and how much you would need. For e.g., lets say you need about 45K annually in your retirement around age 60. Assuming you go on to live for another 30 years, you need about 1.3 million dollars (30*45000). Another way to think in terms of dividends is you need about a million dollar portfolio of dividend stocks to generate about 50K$ every year at 5% dividend yield. You will only be living off the dividends. Principal can still keep on growing at a healthy rate.

Also realize that its possible you do not even have to actually save a million dollars. You can just keep on investing money over 15-20 years & re-invest dividends. Your portfolio will keep on growing during that time, eventually reaching a million dollars. At that point you can simply stop investing stop re-investing and live off of dividend income. Here is a calculator that shows how starting with 0$, investing 12000$ annually with a dividend yield of about 4% and below avg price appreciation of 5% you can get to 1.4 million dollars in 30 years.

The above are just some numbers I plugged in. You can even do this 12K investment in your Roth account and your taxes will be 0! Feel free to play around on the calculator with different numbers, but living off dividends is definitely possible.

Best free resources to get you started with dividend investing

Dividend Condition(DIVCON) free ratings

This is a free rating system developed by the firm Reality Shares. They rank dividend stocks from highest (5) to lowest (1) depending on their probability of increasing dividends in next 12 months. They look at cash flow, future earnings, buybacks, dividend trends, etc. to come up with this rating. Although not iron clad, but its a good thing to check up on when deciding to buy a dividend stock. We have heard the saying safest dividend is the one that has just been raised. This tool allows you to find out stocks that most likely will raise it! Its also a good idea to look at their quarterly list of worst ranked (1) stocks which hints at possible divided cuts. This could allow you to highlight a stock in your portfolio and go deeper into it. Check more about them here.

Invest alongside the Superinvestors!

Its always good to have some extra information while investing. Sites like Insider Monkey, Whale Wisdom & DATAROMA allow you to see what the most famous super investors like Buffett, Munger, Bill Ruane (Sequoia Fund) etc. bought in the most recent quarter. Most of these websites have free signups which give you the most data you would ever need! I am not saying to blindly buy what Superinvestors are buying. But its always good to get more information. Do your own research, look at fundamentals and make your own decision.

Dividends stocks do come with some risk but with right precautions you can avoid the risky one’s and choose the best dividend paying stocks for your portfolio. I created a free guide for you to get started on your journey to living off dividends. I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. It will show you how to get free access to Morningstar and Value Line reports and how to look at them from dividend point of view. I discuss how you can read most financial news articles from Seeking Alpha, WSJ, Barrons for free even if they are behind paywall! Consider signing up below and get the free pdf version of the insights into dividend investing research and how to keep your dividend income safe.

Check out my complete dividend portfolio of stocks.

Create your own dividend tracking google sheet with graphs and pie charts.

July 12, 2019 1 comment

Thoughts

From boom to impending bust: Cryptocurrency, Blockchain and the Future

Over the last few years a new type of investing option has emerged namely cryptocurrency. They work on a new set of technology called blockchain. This allows them to offer exchange of such currencies without any presence of a financial party to oversee transactions. Freedom from banking institutions and their ridiculous fees, anonymity, ease of use etc are its advantages. Owing to these benefits, off late they appear to be great investment choices. People have been buying up cryptocurrencies and driving their prices even higher. In this environment, I wish to discuss cryptocurrency as an investing asset or an actual currency and feasibility of this panning out long term.

Brief history of Currency

A currency is system of money. It allows people to trade and exchange goods with in any economy. In ancient ages, people used barter system by exchanging some goods and services in return of other. Then few hundred years ago gold, silver and other precious metals were used as currencies. People could inherently see the value of precious metals. So they became de-facto standard for payment. But paying for services in terms of gold and silver every time you go to a market to buy groceries seemed stupid and had its drawbacks. So, then governments around the world started printing bills that were easy to carry and exchange. These bills were backed by the amount of gold/any precious metal held against it in reserves. This was called the gold standard/commodity standard. Basically, governments could not print money more than the amount of gold reserves it had. This would help in preventing inflation. During this time, you could walk into a bank and hand them all your USD bills and ask to be paid in form of equivalent amount of gold. Read about it here.

Then came the age of fiat currency. Countries needed ability to not just prevent hyperinflation but also allow for deflation. They needed ability to control the flow of money in their own countries. So the Central banks (Federal Reserve, Reserve Bank of India, ECB etc.) in countries decided to step away from the gold standard and started printing their own money. The value of the currency was to be determined by economic activity, imports/exports of the country etc. Central banks guaranteed that the bill they have in your pocket is legal tender and accepted in their country. However earlier when the bill was backed by actual amount of gold held in reserve by the country, now the same bill is backed by the central bank’s words. Trust is the essential aspect in all of this. The central banks say their currency has value and so everyone in the country uses it to pay for services and goods. This value can fluctuate every day based on how people perceive/trust the economic conditions in the country and based on economic data. It is also possible for the value of currency to go down to useless as evident with crisis in Zimbabwe and Venezuela recently. The value of ZWD plummeted, and inflation was so high because of some stupid practices by the government. Zimbabwe had to recently scrap their dollar and country started using USD as its official currency! Having said that, fiat currency standard has helped governments navigate tough business cycles and recessions across the world by limiting/increasing the supply of money.

Cryptocurrency as currency

Let us evaluate cryptocurrencies with regards to the following factors based on our reading of history of currency:

Ease of use/Speed

People moved from using coins and precious metals to notes precisely because of ease to carry it around. It was portable, and anyone can keep it in their pockets. Most cryptocurrencies are completely digital. There is no bill for them. Most transactions are online, done using smartphone and internet connection. This is a big plus. When it comes to speed of transactions, some like ripple(XRP) can take a few seconds, while some like bitcoin(BTC) could take a few minutes for a transaction. So some cryptos can work ok for day to day transactions where as some are not fast enough. I do not want to be waiting for a few minutes in the grocery aisle for checkout to make sure my transaction clears.

Stability

The value of a currency needs to be stable. To sell a laptop/any good/service it needs to have a price associated with it. Value of 1 bitcoin was 8218 USD on 8 Feb 2018, 10300 USD on 26 Feb 2018. It changes too fast. The value is just too volatile to keep up with. If there is no stability and trust in the currency how am I to budget my expenses? If let’s say I keep aside 30$ for gas every month which is 0.00365 amount of bitcoins if my gas station accepts it on 8 FEB 2018. Now if the value of bitcoins go up crazy overnight and my gas station only accepts bitcoins, now I need 0.00456 amount of bitcoin to buy same amount of gas on Oct 5 2018. So, it’s just not possible to accurately rely on any cryptocurrencies long term value.

Reliability

As I mentioned, trust is at center of all currencies in the modern Fiat world. If people did not believe in the backing of Federal Reserve any longer, USD will be worthless piece of paper. So who backs cryptocurrencies? What sort of economic data, import/export activity occurs in form of crypto currencies ? Is there any government that considers any cryptocurrency legal tender? While the idea of kicking it in the face of banks and financial institutions who charge fees to facilitate some transactions, have centralized power to accept/reject transactions seems nice. It does come at the cost of reliability and trust. Its extremely difficult/next to impossible to reverse any crypto transaction. If you get scammed, you’re in trouble. You can not contact anyone or any central authority to try and resolve an issue. With my credit cards and banks, if my package from amazon doesn’t get delivered, I can contact amazon, my bank etc. to reverse transaction. Banks might charge you fees for doing some transactions, but they do work for it. They provide you with a level of trust and reliability for your transactions and charge fee for that. Inherent point of cryptocurrencies providing a decentralized system defeats the purpose of providing a reliable one too.

But my cryptocurrency is an investment!

Let’s try to break this down. So, what is an investment? Hopefully your definition includes you putting in some money in an asset and it increases in value after some time. You expect your asset to return some money in form of dividends and keep growing and making you wealthy in the process. For e.g. let’s consider a stock/part ownership in a public company. A good company will make profits a part of which it might give back to you as dividends. A part of it might be used to invest in R&D make new products and grow more etc. So if eventually you bought a stock in a good company at reasonable value, it will go up in few years’ time since the company is growing. The company is using its own assets to make money and turn a profit.

Let us even look at your house, suppose you buy a house and put it on rent. You invested money to buy it and are now getting paid rent every year to own an asset. It’s working for you to make more money. Your house is an investment asset!

Now let’s look at cryptocurrency from this point of view. So say I invest 1000 USD in bitcoins. Now after I make that investment, why would the price of bitcoins go up? Is there a product that is being sold by Bitcoin? Any income statement being generated at the end of the year, or any dividend I might get by investing in cryptocurrencies? Is there any profit being generated that Bitcoin uses to invest back in its own products etc. ? I do not think so! The value for crypto currencies has increased just because of the perceived benefits like de centralization, no exchange rates etc. Whenever people try to buy cryptocurrency as an investment they are just hoping its demand increase and value goes up. In short they are speculating that they can cash out at a higher price. There is no absolute reason anyone can tell why cryptocurrencies will go higher in the future. My friends, if you want to actually invest, there are far better ways like investing in real companies which are far simpler to understand. They make money, turn out a profit give you dividends invest back in business and keep growing. Why would you not want to invest in a good company rather on a cryptocurrency which you have no idea how people will perceive it in future.

Many failed attempts at using Cryptocurrencies already

Retailers like Dell, Microsoft, WordPress, Expedia started accepting bitcoins a few years back. At that time, it seemed like bitcoin could be used as a legit currency. However, within a few months most of them stopped accepting crypto currencies as a form of payment. They just went mum about it and have never spoken about it again. My guess is It was too volatile, and I can also go ahead and tell you they probably sold all of it already. Check out this article which delves deeper into why these retailers might have stopped accepting bitcoin. I have actually not come across any business or person who actually wants to hold crypto currencies for long term. Even if they accept these coins as legitimate payment, they just want to convert them back to USD or any other currency soon after getting it. Why so? If you believe in the value proposition of bitcoin, why not go long and hodl? Why sell to convert to USD or anything else. This itself shows lack of trust people put in the cryptocurrency network.

Illegal/Anonymous use of cryptocurrency

So far, the only places I have seen cryptocurrencies being used in are mostly illegal! Sites like SilkRoad which allowed you to buy illegal drugs, pirated movies, other activities etc. All these transactions were facilitated using exchange of cryptocurrencies. Why? Simply because they allowed you to be anonymous! You could do anything/buy anything using crypto currencies and no one would know.

Blockchain is the real value

In my opinion crypto currencies are just going to be worthless eventually. Where is the value? Its in the underlying technology. Blockchain as you may know is the actual underlying technology that most of these coins use. It allows them to be decentralized and police each other in the system. Basically, every node in the blockchain has its own copy of the data. It must match all other node’s copies. Its only possible to add new data and not remove anything. So that makes it difficult to forge or try to cheat since you would have to do that on all nodes across the network. I am not going to go into the details of how blockchain works as part of this article. But essentially the tech provides multiple decentralized repositories which are accurate, authentic, verifiable etc. Those are some feature that are highly desired in a lot of applications. I would imagine companies will or have already started building up their applications on top of blockchain concepts. Some example can be:

Supply chain systems

Most companies use a very complex network of suppliers that could ship multiple or just one of the raw materials required in the process. Many companies even have multiple suppliers for same raw material. Currently most of these suppliers and customers only transmit the data to one another using web services etc. But they don’t really keep it in sync, some do not even do this electronic transfer and its just someone doing this manually on one end. Blockchain will be able to provide a real time accurate data of any piece of the supply chain anywhere all the time. Imagine multiple companies in a supply chain coordinating to put all their data on a blockchain. Say for example a farmer, some big company that sources farmers produce as raw materials, creates finished goods/packaged food etc and ships it out to various grocery stores. Now imagine if all this data is shared and in sync between all parties. If a health hazard like E.coli or some disease spreads in a city and is tracked down to one of the products of the company in question. Imagine how easy will it be to track the scale of the issue and take effective steps to prevent or remove the concerned product from shelves. Currently when such a thing happens, most producers are forced to remove everything from shelves, every can of that product from the grocery stores. Maybe blockchain will help them pinpoint the root cause in supply chain instantly! It might be possible to accurately tell which specific farmer’s crops problem and which specific cans had need to be removed from shelves rather than all of it. Imagine the cost savings for everyone from farmers to grocery store operator in the supply chain. Read more about benefits in supply chain here.

Amex Membership Rewards use of Blockchain

Another example is how American Express has recently opened their rewards platform for use on other websites using Blockchain technology. Basically, they have allowed merchants and grocers to advertise their own MR points promos on products they want to move off shelf to customers. Once customers make the purchase, information can travel to amex, retailer and product manufacturer about the purchase. This allows all parties to evaluate how the promotion performed for them. This information ic closely guarded by retailers. But with blockchain this should be available to all parties. This apparently also helps save time to market for promos shortening it from months to weeks according to Amex. This is truly a great use case for using blockchain. Read about it here.

In Conclusion

I see use of blockchain in a lot of applications for security, digital fingerprint, or to establish a digital trail in cases that need a lot of security etc. But most of these applications will just use blockchain on backend. A user won’t be able to see any difference on the front end using applications or in doing certain tasks. The application on back end will just be using blockchain tech to be more secure and get more efficient. Due to these issues of scalability, trust and governance for cryptocurrency, I highly doubt cryptocurrencies will ever be adopted for use wide scale. I neither consider them to be fit for use as currencies nor as investments. I could even go ahead and say its possible banks might adopt blockchain as a tech that might help them facilitate faster, reliable quick settling transactions for traditional currency. Instead of the SWIFT tech which takes a few days to settle international transfers.

I would love to hear your thoughts and discuss about cryptocurrency and its future. Please comment below and I will make sure to engage in the discussion.

October 18, 2018 0 comment

Investing

REIT Investing: What, How and Why

As you all know from my previous articles, dividend investing is my favorite style of investing. Although along with that, I also like to make sure my portfolio has different type of assets. One way to do this is via real estate. However not all of us have the money to pay every month for mortgage. Here is where Real Estate investment Trusts (REIT) come in.

What are REIT’s?

A REIT is a company that owns, operates and manages real estate assets around the world and collects rent to make money. There can be publicly traded or privately held REIT’s. The good thing about public REIT’s is that they are required by law to pay out at least 90% of their taxable income in form of dividends. This makes them excellent alternative to just normal dividend stocks. Public REIT’s usually operate in a single industry. For e.g. Data Center, Telecom towers, industrial, storage, healthcare properties etc. This is not a hard and fast rule though. Some REIT’s do invest in all types of properties. There are also some REIT’s which invest in mortgages and make money using the interest payments on mortgage instead of collecting rents and managing properties. They are called mREIT’s but we will only be focusing on Publicly traded normal REIT in this article.

Advantages of REIT’s

Juicy Dividend Yields

Since REIT’s are legally mandated to pay at least 90% of their taxable income, they have high dividend yields. Most REIT’s can pay 4-5 or even 7% sustainable dividend yields. As compared to the average 2-3% dividend of rest of the S&P 500, REIT’s dividends are amazing! These yields are also usually very stable since most tenants are in long term leases which have increases priced every year as per inflation at least. However, check out various ways to ensure/safeguard you keep getting dividends at the bottom of the article.

Instant Diversification

Since we know its very important to diversify in various asset classes in your portfolio. REIT’s help in this regard. REIT’s indirectly make you owner of real estate. They usually have low correlation with stocks so, helps with reducing risk in your portfolio. Plus, best part is you get to be a real estate owner without doing the hard work in maintaining or collecting rents or paying any mortgage. Agreed they do trade like stocks, but REIT underlying asset that produces income is real estate.

Liquidity

Publicly traded REIT’s can be bought and sold just like stocks. So its easier to re balance your portfolio if needed. There are other private platforms like Fundrise and Real Estate Mogul that allow you to invest in REIT’s. But they are bound by extra rules on when you can sell and how much you need minimum to invest. So, publicly traded REIT’s are what I would suggest buying.

Proven long term performance

REIT’s over the last 25-30 years have returned over 11% annually reinvesting dividends. That is a great rate of return for any asset class given the fact we have had 2 recessions in that time. (courtesy NAREIT)

This kind of performance has been almost second to no other group of equities.

Risks/Disadvantages of investing in REIT’s

Sensitivity to Rising rates

In a rising rate environment like today’s, REIT’s compete with other asset classes. For e.g bonds and US treasury rates increase which are usually safer than REIT’s. So a 3% bond would be appealing to people as compared to a 4% REIT with amount of risk involved and REIT usually under-performs. However, having said that if you are a young investor with retirement after a decade or two or more. Then what is there to worry about! Just relax and reinvest the dividends and watch your income from REIT stocks keep growing. Over long term even rising rates usually benefit economy and help in raising rents across most properties and helping REIT’s.

Industry Risks

Most REIT’s operate in a specific industry and are susceptible to business risks weighing down respective industry. For e.g. recent fears over retail apocalypse over slowing sales in 2016-2017 lead to huge decreases in stock prices of most retail-oriented REIT’s. However, if you just focused on fundamentals and bought/invested then, most REIT’s are way more up since then this year.

Tax treatment for you

As we know publicly traded REIT’s are required to pay out at least 90% of their taxable income and they are exempt from paying any income taxes. But then for this reason, you get taxed at full income tax rate on unqualified dividends you receive from REIT. Instead of the favorable tax treatment at lower tax bracket for normal dividend stocks. So, its important to understand what type of investing account they should go in to minimize taxes/eliminate taxes. Yes! its possible to pay absolutely no taxes on REIT’s and get the high dividend yield they offer.

Different Type of REIT Sectors

As mentioned, REIT’s can operate in different industries and business. Type of industry has a lot of impact on REIT’s ability to earn rents. Here are some examples:

Industrial: These invest in making warehouses, distribution centers, logistics center for housing any kind of equipment’s, process, materials required by customers. Some examples include Prologis Inc, Plymouth Industrial etc.
Telecom: These invest in creating tower sites that which network operators use to provide cell services. Some examples include American Tower, Crown Castle Inc etc.
Data Center: These invest in building huge infrastructure for data centers which big tech companies rent. They are usually fitted with features like extra cooling, 24*7 power supply and extremely secure environment. Some examples include Digital Realty, Cyrus One etc.
Retail: These invest in single standing or mall like shopping centers. Some examples include Realty Income, Store Capital etc.
Healthcare: Theses invest in creating hospitals, nursing homes, skilled nursing facilities etc. Some examples include Omega Healthcare Inc, Sabra Healthcare etc.

Other sectors include Office, Residential, Timber based REIT’s etc. You can find more about them here. Its important to know that at any given time, its easily possible that one sector of business is booming and REIT’s involved in that sector will also be booming.

In Conclusion

There are a lot of other factors like adjusted funds from operations AFFO, management etc to look at when choosing REIT’s. Factors to ensuring/safeguarding that dividend yield. Correct investment accounts to buy REIT’s in etc. To know more on how to go about choosing best REIT’s please consider subscribing below for free to help support the blog.

October 1, 2018 0 comment

Investing

Investing 101: Why Invest Money?

As I mentioned in my article on being wealthy and its importance. One of the important ways using which you become wealthy was investing. Investing prudently over long term gives you the most returns for your money. Here are some reasons why you should invest your money.

Advantages

1. Invest to beat inflation

On an average we have around 2-3% inflation every year. So whatever items, products you bought last year cost 2-3% more this year. Most checking/savings account as of 2018 give you around 1.50%. Even if you put 1000$ in your account to save, it’s only going to be 1015$ next year. But the same 1000$ worth of products from last year is going to cost you 1030$ because of inflation. You are losing money by keeping the extra in your checking account. Most people do not realize this and are often scared of investing and growing money to beat inflation.

2. Save on Taxes

The government usually incentivizes us to be an investor. By contributing to traditional IRA and 401k’s you can reduce the amount of money that is taxable every year. That way you pay no tax on contributions today and way lesser based on your tax bracket after retirement. Similarly using Roth versions of 401K and IRA’s, you pay taxes today let the money grow and never pay any tax after retirement. Even the dividends that you get every year are taxed lower than the income tax. You can even do tax loss harvesting to reduce the amount of tax you pay on capital gains from sale of assets in loss.

3. Retirement Goals

Chances are when most people retire they will see a big dip in their annual earnings. Social security is having a huge amount of problems. The money most people will get from social security is not going to be enough for daily expenses during retirement. One needs an additional source of income and investments usually allow you to just do that. But its important to start saving early to sit back and watch the magic of compounding work.

4. Magic of compounding

Einstein is rumored to have said compound interest is the 8^th wonder of the world. If you save small amounts of money over a long period of time. The interest it earns over interest and principal every year keeps increasing every year. Now imagine investing money slowly every year and getting a 10% average historical return. Slowly you realize the snowball effect compound interest creates over long term. Check out the chart below which compares the returns for 3 people who started investing at 3 different times in their life (courtesy BI/JP Morgan )

Notice how Chris invests just 5k every year starting at 25 and comes out way ahead of the other two people who start late or stop later in their life. So being early and consistent over the long term is what matters.

5. Diversify/Reduce Risk

Investing especially in index funds helps you diversify your money across different companies. This allows you to spread out your risk, in case anything goes wrong with one company. Many people during the Enron scandal invested money but only in their company’s stock. When the scandal broke out, they lost all their life savings. It’s important to diversify and make sure to not have all your eggs in one basket.

6. Financial Independence/Retire Early

Investing allows you to grow money over the long term and once your nest egg is big enough it can become your primary source of income. You can technically earn dividends or take out small percentages every year and let rest of the nest egg grow. This can eventually allow you to stop working forever. You can even spend more time in other non money-making hobbies/family stuff you like. There’s a whole sub reddit devoted to people who have either already retired and are living on their investments or aspire to do so.

Pitfalls/Disadvantages

Having seen some advantages of investing I think its also important to have a look at some disadvantages/ points to remember:

1. High Risks/Volatile

Most investments options usually come with high risks. Most stocks are traded everyday and so go up and down every day. So its important to know if you need any money over the short term (3-5 years), better to not invest that at all. You tend to see better results and more likely to see the 10% per year return over long term.

2. Needs Patience

Segueing from last point, investing usually needs a lot of time. People buy some index funds/stocks and on first sight of volatility they hurry over to sell them. There have been lost of psychological studies which say people feel more loss and pain when they see their investments go down than the joy when they go up.

3. Too complex

For most people investing seems too complex. Most people do not know how to manage risk or what to do or where to begin with. With this fear most, people never even step into investing. However, with my next few articles, I plan to make all this easier, so people realize its not that big of a deal at all.

4. Emergency Fund

Its very important to know that one should always have an emergency fund before investing. Usually it’s a good idea to have 5-6 months of your monthly expenses saved away before you start investing. There could be a stock market crash or any such event which might make it difficult for you to pull out your invested money.

I hope my next few articles in this category will help you choose your own path to investing.

March 26, 2018 0 comment