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How to Avoid Being a Dividend Loser

Don't let dividend taxes get in the way of a smart investment

   

Dividend losers focus on excuses that prevent them from achieving their goals of financial freedom. Dividend winners, on the other hand, focus on creating specific goals, and the steps to make them a reality.

The first excuse that dividend losers use pertains to dividend taxes. Namely, because dividends get taxed at 15% per year, this somehow makes dividend stocks an inferior investment.

Dividend losers use companies like Berkshire Hathaway (NYSE:BRK.B) to prove their point. They like that Berkshire has managed to reinvest dividends from its various subsidiaries into more businesses. However, dividend losers hate to have to research a company, formulate a strategy and execute that strategy themselves — reinvesting the dividends from their income portfolio seems like too much work, making it a losing proposition.

Unfortunately, there is only one Berkshire Hathaway, while there are more than 100 dividend champions — companies that have raised dividends for more than 25 years in a row. While dividend losers are looking for the next Berkshire Hathaway, dividend winners are creating their own Berkshire Hathaways with the generous dividends from their portfolios.

Besides taxation of dividends, another reason why investors fail to make good investing decisions is because certain pass-through entities generate slightly more complicated tax returns. A prime example of that includes pipeline Master Limited Partnerships such as Kinder Morgan Energy Partners (NYSE:KMP) as well as Enterprise Product Partners (NYSE:EPD).

Focus on identifying the best opportunities that will deliver the best results first, and only worry about taxes later on. I have witnessed investors who wanted to sell stocks, but did not because they waited a little longer so they’d qualify for a long-term capital gains treatment. After they qualified, the paper gains had evaporated and turned into losses.

Warren Buffett, for example, made his first $20 million by running a hedge fund that was structured similarly to a master limited partnership of today. Investors who avoided his partnership because they did not want to complicate tax returns missed the opportunity of their lifetimes.

Another excuse that dividend losers utilize is that they do not have enough money to start investing. But if you fail to save a sufficient nest egg, you won’t be able to retire.

Buying high-yielding REITs such as American Capital Agency (NASDAQ:AGNC) or Hatteras Financial (NYSE:HTS) is not going to solve that problem, however. When the spread between short-term interest rates and the rates on mortgage bonds declines, you could see dividend cuts across the board, which likely will lead to you searching for a job to pay for expenses.

In short: To avoid being a dividend loser, and to instead live off your nest egg, focus on the market’s best opportunities first, then worry about other items like taxes later. By being flexible, and adapting your strategy to fit the external environment — and not simply searching internally for strategic insight — you can avoid pricey mistakes that could derail your retirement.

Full disclosure: Long KMR, KMI and EPD.

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Article printed from InvestorPlace Media, http://investorplace.com/2012/10/how-to-avoid-being-a-dividend-loser/.

©2014 InvestorPlace Media, LLC

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