For April and May I bought JNJ and HRL. Both were solid companies offering 2-3% dividend yields. Unfortunately this is not much with respect to current income. For instance, AT&T offers a monstrous 5%, Southern Company 4.58%, and Target 4.22%. The challenge we face, as dividend investors, is to find companies with above average yields and strong growth prospects. Such companies also need to be financially strong and (hopefully) recession proof. A company may carry a 10% yield one year and be out of business the next. Yield isn’t everything.
Years ago I experimented with income equity funds. The security I owned, EXG, payed 10-11% or about 1% per month. The payments came in but the stock price declined. Even worse, the payments were taxed as ordinary income, not capital gains. Essentially this security depreciated in value and complicated my tax situation. I ended selling for a small capital loss towards the end of 2016. This brings me to my next “yield” experiment; REITS.
REITS or real estate investment trusts are companies who own/operate income producing real estate. REITS cover a wide variety of commercial real estate including offices, retail, housing, warehouses, hotels, and hospitals. To avoid paying federal income tax REITS typically pay out an amount equal to at least 90% of their taxable income in the form of dividends. This makes REITS strong income producers. Some examples include WPC (diversified real estate), PSA (public storage) and MPW (hospitals).
Unfortunately many of these companies carry additional risk. Occupancy may decline in periods of economic downturn. Also, many such companies have high payouts and large amounts of debt. Furthermore, REIT distributions are generally taxed at a higher rate. Taking all this into account, REITS still offer diversification and convenience. It can be a hassle buying properties, fixing them, and dealing with annoying tenants. Instead, investors can gain real estate exposure through REITS. I’m looking into a variety of REITS and may buy one later this month.
DISCLAIMER: I am not a licensed investment advisor or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.