No matter what side of the fiscal cliff debate you are on, it
seems pretty clear that taxes are going up. Both sides are now
proposing new increases with some forecasting that over $1
trillion in new revenues will be collected over the next
A big part of this increase could very well be in the form of
new dividend taxes. By some estimates, this favorable rate-which
is currently at 15%-- could nearly triple if we go over the
Fiscal Cliff, pushing these rates (possibly) up to just south of
This situation has certainly impacted investors that have a
dividend focus, pushing down firms that are in traditional high
yield sectors. Key dividend stocks in sectors like utilities have
been getting crushed, and other firms with big payouts haven't
exactly been doing much better with this cloud of uncertainty
3 ETFs to Prepare for the Fiscal Cliff
Yet even with this issue, high payout stocks remain in great
demand among a variety of investors, thanks to the low rate
environment and the lack of quality alternatives in the bond
world. So what is an investor to do if they want to still capture
high yields but are looking to avoid the risks that come with a
massive dividend tax increase?
Focus on Ordinary Income
While most securities pay out investors in the form of
qualified dividends, there are a few that utilize a different
structure in order to have their yields be categorized as
'ordinary income'. Generally speaking, this is done to avoid
double taxation, but it also results in huge payouts, as usually
more than 90% of income must be paid out to investors on a yearly
Although it is true that the current rate on ordinary
income-for the top bracket-is also expected to rise, it could
still stay below the 40% mark. This means that if dividend rates
go up to their highest projected level, income derived from
ordinary income focused securities could actually be a better
deal from a tax perspective while having less policy risk before
any decision is made as well (read
Escape the Cliff with These Dividend ETFs
If that wasn't enough, these securities usually pay out more
to investors anyway so they could truly become a top yield
destination if the worst happens with the Cliff. While individual
stocks could certainty be a way to approach this problem, an ETF
technique could offer added benefits thanks to the structure and
diversification of these products.
So for investors looking for a different high yielding play
that could be relatively unscathed by the current dividend issue,
a look to any of the following three
may be the way to go:
Master Limited Partnerships are often viewed as the 'toll
roads' of the commodity world. They are usually pipelines or
similar types of assets that store or move products like oil or
natural gas, making them less sensitive to economic conditions
while also having very stable businesses.
As you might be able to guess, these are partnerships so
investors do have to fill out a K-1 form at tax time. However, if
investors buy up ETNs in this space-which are structured as debt
that seeks to track an index-this tax headache is avoided while
still allowing for all of the taxation benefits (and high yields)
that come from investing in the MLP world.
One of the most popular, and oldest, in this respect, is
, an ETN from JP Morgan. It tracks the Alerian MLP Index,
charging investors 85 basis points a year in fees while 50
securities are in the underlying index (see
How to Play the MLP ETF Space
Yields come in above 5% for this ETN, while average volume is
approaching one million shares a day. If that wasn't enough,
investors also have a host of other similar ETNs in the space,
each of which have a different focus like
natural gas (
high income (
, so there are certainly a variety of options for those who want
to take this route.
REITs, or Real Estate Investment Trusts, are arguably the most
famous of the group and are best known for their outsized
payouts. These securities invest in real estate projects or
manage homes and buildings, making them a much more liquid way to
buy up real estate.
The space has over a dozen ETFs giving investors plenty of
choices and various ways to delve deeper into a particular
sector. While there are a number of broad funds in the REIT ETF
world, the most popular is easily the Vanguard REIT Index ETF (
This is an ultra cheap choice-just ten basis points a year in
fees-- that sees great volume of over three million shares a day.
The yield is also pretty good, coming in at roughly 3.5% in 30
Day SEC terms suggesting that it could also be a decent yield
Is the Panic Over for mREIT ETFs?
The ETF also does a great job of spreading out assets as it
has over 115 companies in total. Still, SPG takes up a decent
chunk at over 10% of the total, but beyond that the fund is quite
even and even puts 50% of the assets in securities that are mid
caps or smaller.
Arguably the least well-known of the group are firms known as
'Business Development Companies'. These firms look to invest in
startups and other small companies either by taking debt or
equity stakes that are relatively illiquid.
Much like the others on the list, these avoid double taxation
by paying out more than 90% of their taxable annual net income to
investors. Also, the main way it can be accessed in
Exchange-Traded form is via an ETN, so other tax issues like
return on capital are mitigated and tracking error is eliminated
since it is structured as a debt security.
One of the only ETNs in this space is UBS'
. The note charges investors 85 basis points a year in fees, so
costs are somewhat high, but current yield comes in just below
9.8%. Investors should note, however, that the product isn't that
popular so bid ask spreads may be a little wide, suggesting total
costs could be higher (see
Invest like Mitt Romney with These Three ETFs
Still, it is hard to beat from a yield perspective and it does
a great job of spreading out assets with four companies
accounting for at least 10% of assets and over 28 firms in total.
It should also be pointed out that there is a leveraged version
of the ETN as well,
, and this pays out a whopping 18.7% per year, although it is
certainly more volatile.
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JPM-ALERN MLP (AMJ): ETF Research Reports
E-TRC WF BDCI (BDCL): ETF Research Reports
E-TRC WF BDCI (BDCS): ETF Research Reports
E-TRC UBS AL NG (MLPG): ETF Research Reports
MS-CUSH MLP HI (MLPY): ETF Research Reports
VIPERS-REIT (VNQ): ETF Research Reports
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