Thread: Tax-Advantaged Investing

Tax-Advantaged Investing

Gene Walden
The 100 Best Dividend-Paying Stocks to Own in America
[align=left] or investors interested in income, the choices have been pretty meager in recent years. Yields on bank accounts, short-term CDs and many government bonds barely outpace inflation -- and that's before taxes.[/align]
But Congress did give income investors one ray of hope with its recent tax legislation. The new tax law makes stock dividends one of the best tax-advantaged investments of all income-oriented options.

Under the recent law, the most you would pay in federal income tax on dividend income would be 15% (on stocks held for at least six months). If you're in a lower tax bracket, you would pay at most 5%. This gives dividends a big tax advantage over CDs, corporate bonds, mortgage-backed bonds, bank savings accounts -- even US Treasury bonds and notes, all of which are fully taxable by the federal government. The law change has led more companies to begin offering dividends to their shareholders. It has also prompted more investors to stock up on dividend-paying stocks -- which is one reason the Dow Jones Utility Stock Index has jumped by more than 50% in the past two years while the overall Dow Jones Industrial Average has climbed by only about 15%.

The new tax break is just one of several advantages that dividend-paying stocks have over other income-oriented investments. Many stocks have higher yields than most other types of income investments. Although most dividend-paying stocks have yields in the range of 1% to 2% annually, many of the leading dividend-paying companies, such as utilities, financial firms, real estate investment trusts, and energy companies, offer dividends of 4% to 7%.

Perhaps the biggest advantage of dividend-paying stocks is an increasing stream of income. Unlike traditional bonds and CDs, which pay a static return year after year, many growing companies that pay dividends raise those dividends almost every year. This increasing stream of income can help you keep up with inflation.

Certainly all stocks -- including stocks that pay dividends -- carry some degree of risk. Stock prices can be volatile, but over the long-term, dividend-paying stocks have proven to be more likely to increase in value over a period of years rather than decline.

Choose your portfolio with care. The riskiest picks in the dividend stock universe are those that pay the highest yields. Beware of stocks that pay yields of 10% to 12% (or more). In most cases, such high yields are caused by drops in the stock prices (the yield percentage goes up as the stock price declines). And most serious price declines are due to financial problems within the company.

Rather than buying the highest-yielding stocks, build your portfolio with stocks across a broad range of industries that have strong earnings and revenue growth. Choose companies that tend to raise their dividends year after year.

Here are three dividend-paying stocks to consider for your own portfolio...

Bank of America (BAC) pays a dividend of about 4%. The Charlotte, North Carolina, bank holding company has increased its dividend for more than 15 consecutive years. BAC has grown rapidly through mergers and acquisitions, including the 1998 merger of NationsBank and Bank America, the 2004 acquisition of FleetBoston Financial and now the purchase of MBNA. In all, Bank of America has about 5,900 branch offices in 29 states and the District of Columbia, as well as significant international operations, with offices in Europe, Asia and North and South America, and customers in about 150 countries. The company's earnings and revenue have grown consistently over the past seven years. Recent share price: $44.73.

Kinder Morgan Energy Partners (KMP) pays a dividend of nearly 6% and has seen its revenue and earnings grow consistently for the past 10 years. KMP, a major mover in the US fuel market, owns and operates more than 25,000 miles of pipeline used to transport fuel and natural gas around the country. The Houston-based company is the nation's largest publicly traded pipeline limited partnership and the largest independent refined petroleum products pipeline system in the country in terms of volume delivered. It has increased its dividend for eight consecutive years. As a limited partnership, KMP's dividends do not qualify for the full tax break that other dividend-paying stocks receive, but for most investors, the tax on dividends would still be less than their standard income tax rate. Recent share price: $52.12.

Duke Realty Corp. (DRE) is a real estate limited partnership that yields about 5.8%. Although the Indianapolis-based firm saw its earnings drop slightly in the first quarter of this year, it is expected to post solid returns for the rest of the year. The company has a broad portfolio of real estate properties that is diversified by both type and location. It owns and operates industrial, office and retail buildings in 13 US cities, primarily in the Midwest and Southeast. In all, DRE owns and operates about 900 properties, encompassing about 120 million square feet of building space. The company has a total market capitalization (real estate) of about $8 billion. Recent share price: $32.28.