Investing Can Pay Dividends

By Brad Lafferty

January 2016

Dividends accounted for almost all of the S&P 500 returns from the beginning of 2000 to the end of September 2012. 

Dividend (div΄ uh dend) n.  A sum of money paid regularly by a company to its shareholders out of its profits or reserves.

Savvy investors have long understood the power of dividends.  Think about it, if I receive a percentage of the value of my investment on a regular basis, every time I get paid, I lower my overall risk to my principal.  Also, I may see a larger overall return on an investment that rises in value if I am realizing a regular dividend from that company.  Seems simple enough, but don’t rush in too quick.  When choosing dividend paying investments, always ask the following questions:

  1. What is the source of dividends?  Investments may legally pay a dividend from a number of sources including profits, cash, incurred debt, investor money, or any other source.  Read your shareholder reports and prospectuses.  A high dividend may or may not mean a profitable company or investment.  Understand the source of the dividends before getting too excited about the yield.
  1. What is the FFO?  FFO, or Funds from Operations, is a key metric for gauging the health of many investments; especially non-traded real estate investment trusts (REITs) and business development companies (BDCs).  The measurement determines the percentage of the dividend that is derived from the operating revenue of the company.  If the FFO coverage is only 90%, that means that 10% of the dividend may be coming from cash, debt or other sources, rather than from profits.  If this does not improve, it may hurt the success of the investment over time.
  1. How are dividend payouts determined?  Dividends are paid at the discretion of the company or fund.  They are not guaranteed and may be changed or stopped at the discretion of the company or fund.  It is wise to research the history and track record of the investment and its management when choosing a dividend paying security, especially if income is one of the goals for choosing the investment.
  1. Are dividends taxable?  If you receive dividends in a non-qualified account, they are generally considered taxable income and should be reported to avoid problems with the IRS or your state taxing authority.  You should expect a 1099-DIV for these dividends.
  1. Is All Investment Income a Dividend?  If you have a Limited Partnership, for example, you may receive a periodic payment each month or quarter, but the payment is not a dividend, per se.  You may also notice on your statement that there is a return of principal included as a portion of some or all of your income payments.  These are partnership distributions, not dividends, and will have different tax consequences than ordinary dividends.  Partnership distributions that include a return of your capital are often paid out to defer taxation of the profits and increase possibility of a long term capital gain.  Be certain to verify whether a limited partnership investment creates UBTI (Unrelated Business Tax Income) before purchasing into an IRA.  UBTI can create a tax inside an IRA, even though the IRA provides tax deferral for earnings.  A possible indicator of potential UBTI tax is whether the tax reporting is a K-1 rather than a 1099-DIV.

Estate Planning 101: The 5 Documents Everyone Needs

Leif Olson, Attorney at Law

Most of us will never need corporate bylaws, or formal employment contracts, or (except for speeding tickets and jury duty) to see the inside of a courtroom. But that doesn’t mean that none of us will ever need to speak with a lawyer. The opposite is true: All of us, eventually, are going to come to the ends of our lives; many of us will face a serious illness along the way. None of us know when that will be — but only a lawyer can help us ensure that, when that time comes, we have protected our families with the five legal documents that everyone should have.

  1. Will.  Most of us are familiar with wills: A will distributes the property that you own to the beneficiaries that you select. It appoints an agent, the executor, to distribute that property and manage it until it is distributed. Without a will, your property will not necessarily be distributed as you would like, but as the Texas Legislature has set out in the Estates Code. If you have minor children, your will is where you should name a guardian for them. The probate process in Texas is streamlined, enabling wills to be flexible and easily administered, without the large expense that has historically been the case.
  2. Durable Power of Attorney.  A power of attorney appoints someone to act on your behalf; a durable power of attorney appoints an agent to manage your property if you become unable to do so. (“Attorney” is just an English version of an old French word for “appointee.”) The appointment is durable because it is ongoing — it doesn’t expire if you lose the ability to manage your property. In fact, it is usually drafted so that it doesn’t take effect until you lose that ability. If something robs you of the ability to manage your property, a properly drafted durable power saves your family the time and expense of going to the probate court to have a guardianship established to manage your property.
  3. Medical Power of Attorney.  Just as the durable power of attorney appoints someone to manage your property, a medical power of attorney appoints someone to manage your person if you can’t do so anymore. This agent has the power to make medical decisions — for instance, on types of treatments, medications, surgeries, and hospitalizations — on your behalf. If you lose the ability to make medical decisions for yourself, a properly drafted medical power saves the time and expense of having a guardianship over your person created.
  4. Physician’s Directive.  A physician’s directive, also known as a living will, tells your doctors, family, and medical agent how to handle your medical care in certain situations. Though it can cover any conceivable medical situation, it is usually used to let others know whether you would like medical care withheld if you have a terminal or irreversible condition. This directive saves your family the heartache of having to guess at your end-of-life wishes and helps prevents the rancor that can develop if family members disagree on your wishes.
  5. HIPAA Release.  The Health Insurance Portability and Accountability Act prohibits hospitals and health-care professionals from disclosing your medical information and records. A HIPAA release instructs them to release that information to your family or medical agent. Without that release, they must make decisions about your health care without being able to see your medical history.

Long-Term Care Insurance is NOT for YOU

By Ruben Perez

“I will never need long-term care!”

Rarely true.  Only three out of ten Americans over 65 can make this statement. The rest of us (a little over 70%) will need some sort of extended care in our sunset years , either in the comfort and familiarity of our own homes or in a paid facility.  For those of us in the 70%, there are four options for getting the care we will need:

  1. Asking Family for Help
  2. Relying on the Government
  3. Using Up Our Own Assets
  4. Buying Insurance

November was long term care insurance awareness month.  Over the next few months, I will briefly explore the practical implications of the various options for funding our long term care needs.  The present article will address the option of asking family for help.

Long-term care, or extended care, is assistance needed
due to the mental or physical decline associated with aging,
a lengthy illness and/or recovery period, or a severe cognitive
disorder, such as dementia or Alzheimer’s.  These conditions
can leave us unable to perform certain of the six activities
of daily living (ADLs.)  ADLs include the inability to perform
any of the following functions without assistance:  walking,
eating, bathing, dressing, toileting,  or transferring.

“My family will take care of me.”

Many people plan on asking a family member or close friend to provide aid to them in their older age. As we get older, our bodies and minds slowly deteriorate. That is a hard fact for most of us to swallow, but it is true. Things we used to be able to do when we were younger are not so easy to do anymore, and for some of us, they can become completely impossible. Decision-making gets more stressful, and confusion and uncertainty set in. At some point, most of us will need assistance doing everyday chores, and even caring for our own personal hygiene (showering, grooming, toileting and the like).

Loved ones who become caregivers end up putting their careers, families, and lives “on hold” to provide for our care. They take off more often from work to care for us; they give up time they could and should be spending with their own families to care for us; and, they devote their “free time” to caring for us. Do you want to put this burden on your spouse, son, daughter, relative, or friend?  Why not put a plan in place to maintain your independence and ensure that the people you care about most do not become burdened with your care?

Managing Investment Risk

By Noel R. Vincent

Everything Has Risk
Risk Tight Rope WalkerWhen it comes to investing, there are no risk-free options. Bank certificates of deposit (CDs), for example, have opportunity cost risk (they rarely pay more than 1% annually these days, and other vehicles offer significantly higher potential returns). Stocks have market risks (individual stocks and broad markets can drop unexpectedly and languish for long periods of time, even years). Bonds have interest rate risk (rates can go up while you’re locked into an older bond at a lower rate, which can severely diminish the value of your bond). Even hiding your money under the mattress exposes you to inflation risk (the general rise in prices eats away at your money’s buying power), not to mention theft risk. All investments have risk – there are no exceptions.

What’s a Body To Do?
Since risk cannot be eliminated, it must be prudently managed. Managing investment risk means layering your portfolio with lots of different types of risk. I know this seems counter-intuitive, but stay with me. The more types of risk represented in a portfolio, the greater chance it will weather a major storm. No particular sector of the market or type of security will be able to take the portfolio down. Stocks, bonds and cash are simply not enough in these distressing financial times. The best portfolios will add some combination of real estate, energy, private debt and equity, annuities, commodities, and international holdings to lower risk and stabilize returns. The object is not to avoid risk (which can’t be done), but to minimize it by compartmentalizing the risk into smaller sub-allocations across the available bandwidth of asset classes.

Diversification Is Not Owning a Hundred Different Stocks
When the tide goes out, it lowers all the boats in the harbor. Owning a hundred stocks, even in multiple industry and style categories, does not protect you from downside market risk. If the market drops, your whole portfolio will drop with it. After two major market corrections exceeding 40% since the year 2000, you’d think we’d have learned a few things. Adding more types of risk to your portfolio actually lowers your overall risk. Get the facts and take action.