The Best Kind of Income
Fifteen days after the April 15 income tax deadline more tax-free income appeared in our ROTH IRA accounts. In a previous post I talked about “Tax-Free Dividends Via Roth Conversion.” The goal is to have “More Real Income Without the Sucking Sound.” The “sucking sound” I hear when I consider investing comes from fund expenses and income taxes. Any time I can reduce or eliminate expenses or reduce or eliminate income taxes, I free up additional dollars for investing and for charitable giving.” I also want to focus on “easy income” and dividends are as easy as it gets.
Much of our income during our pre-retirement era was taxed by the federal government and the Wisconsin state government. Those entities have an insatiable appetite for more money. Sadly, spending more doesn’t often equate to better results. Governments are notoriously bad at wise spending. Therefore, every dollar that we can keep for better spending is a good thing.
This morning I saw several dividends posted to our Fidelity Investments accounts. Most of the dividend income is tax-free. We can withdraw it and it doesn’t increase our taxable income. The following image shows the twelve investments that paid a dividend. Some of these investments pay quarterly, some pay monthly and a few pay weekly. The total tax-free income was $2,028.27. To emphasize the value of this, for this year it means about $400 won’t be deducted from that amount when it is time to pay Uncle Sam and Wisconsin. (Total April 30 dividend income was $3,262, so some is tax-deferred and some is taxable.)
QUANT Ratings of These Twelve
In fairness, you need to understand the risk. I accept some additional risk from a Seeking Alpha Quant rating perspective. Two of these investments appear to have a very high risk: YMAG and ULTY. (I created this image by using the Seeking Alpha “Create Portfolio” option. I called the new portfolio “April 30 Dividends.” This is very easy to do.)
Bear in mind, however, that I also track total returns, not just price returns. For example, our YTD dividends from ULTY are $3,007. Total dividends since I purchased ULTY are $6,674. My total cost basis for the ULTY shares is $20,753.56. The current value of the shares has dropped to $15,153.65.
On the surface this looks like a loss of $5,279. However, after you add back the dividends, this investment is $1,395 in the positive. While that is not outstanding, I’d rather have $20K invested in ULTY than in CDs. You may not want to do the same. I’m willing to let this experiment run.
Investments By Sector
Seeking Alpha also makes it easy to download the new portfolio to Excel for analysis. This image shows a custom view I created to view the names of each investment and the sector information. You can see that the April 30 dividend investments are varied but concentrated in the financials and “alternatives.”
Consecutive Years of Dividends
One metric that can help an investor see the reliability of dividends from a historical perspective is the number of years the investment has paid a dividend. In this table seven of the investments have paid a dividend for at least 12 years. CSWC is certainly the leader in this category.
Recommendations
The focus of this post was educational. Don’t make my investments your investments. Secondly, bear in mind the relative size of the investments in your portfolio. For example, our investment in EOG is $138K while ULTY is only $20.7K in all accounts combined. My current traditional IRA balance is $1.75M and my ROTH is $1.2M, so $20K is a very small allocation.
Finally, don’t overlook the power of ROTH conversions – the sooner the better for Tax-free income.
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