Most dividend investors have fallen victim to these mistakes before, and if you do not correct them, it could end up meaning thousands of dollars lost over the long-term. See if you’re making these costly mistakes and how to correct them in this article.
There is tremendous interest in high-yield stocks. Unfortunately, there is more bad or inaccurate information out there on how to find and analyze high-yield stocks than there is good.
I hear it all the time from my subscribers. They have been told things about different classes of high-yield stocks that are just not correct. Today, I will cover some misconceptions in the high-yield energy infrastructure sector and how to determine which high-yield stocks in that group are safe and appropriate for your investment goals.
Traditionally, most of the energy infrastructure companies were organized as publicly traded master limited partnerships (MLPs). However, the energy sector crash has “motivated” the infrastructure companies to look at and implement alternative structures, so they can continue to bring value and pay attractive dividends to their owners (in this case, us).
As a result, investing in this sector in 2017 has become very different compared to the MLP investment themes of 2014 and earlier years.
Energy infrastructure companies own the assets that provide transportation, storage and transfer of energy commodity and finished products. Revenue and growth for these companies are not much affected by energy prices. They are affected by the sources and amounts of different energy products produced and consumed, primarily in the U.S.
I most often receive questions about taxes when I discuss and recommend energy infrastructure stocks. The mention of MLP is followed by the assumption of Schedules K-1 and tax filing issues. While the majority of publicly traded partnerships continue to send K-1’s to investors, there are plenty of exceptions and more today than existed several years ago.
A company organized as a partnership, such as a publicly traded MLP, can elect to file and be taxed as a corporation. When a company makes this choice, it then sends Forms 1099 to investors. A 1099 reporting MLP is handled for taxes just like all the rest of your investments.
Currently, about 20 companies organized as partnerships in the energy infrastructure sector are 1099 dividend payers. Also, a handful of companies formerly set up as MLPs have been merged into their corporate sponsors, and the corporations (1099 reporters all) have taken on the dividend paying characteristics without the troublesome tax characteristics.
Another way to avoid investing in K-1 reporting stocks is to use packaged investment products. Exchange traded and closed-end funds (ETFs and CEFs) that own MLPs absorb the K-1 reporting issues and send Forms 1099 to investors that own the funds.
The tax factors are important for a couple of reasons. Because it is impossible to predict the tax consequences of doing so, I have a blanket recommendation to not own any K-1 reporting stocks in retirement/IRA types of accounts. I also think that investors should not own K-1 reporting MLPs without understanding the consequences.
There are pros and cons to the mainstream MLPs, but most investors just see the nice yields and do not understand there could be additional work and costs when tax time rolls around. You will not see the mainstream and Internet investment news outlets explaining these pluses and minuses.
To help subscribers of my Dividend Hunter newsletter, I have a policy of only recommending 1099 reporting stocks, including the five energy infrastructure stocks on my current recommendation list.
The bottom line is that before you even start to analyze the dividend paying potential of a high-yield stock out of the energy sector, check on the tax status of its dividend payments for you as an investor in the company. There is a range of alternatives, which are not typically explained.
Then, if the tax characteristics work for your situation, look at the cash flow coverage and if there is sufficient growth to support it.
As an example, one of my recommended energy partnerships is Golar LNG Partners LP (Nasdaq:GMLP), which owns liquefied natural gas transport ships. GMLP is a 1099 reporting MLP. It currently yields 10.6%, and in 2016 the dividend was covered 1.32 times by free cash flow. That is a very healthy coverage ratio in the MLP space where 1.1 times is often considered adequate.
My subscribers and I regularly collect big dividend payments that give us financial certainty in an uncertain world, and only the most financially secure high-yield income stocks make it onto the recommendation list for my newsletter, The Dividend Hunter.
Right now, there are 20 high-yield stocks currently available through my Monthly Dividend Paycheck Calendar, a system for generating a recurring monthly income stream from the market’s most stable high-yield stocks.
The Calendar tells you when you need to own the stock, when to expect your next payout, and how much you can make from these low-risk, buy and hold stocks paying upwards of 12%, 13%, even 18%. I’ve done all the research and hard work, you just have to pick the stocks and how much you want to get paid.
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