OK, so you’ve recently changed jobs or retired, and you’ve successfully rolled your 401k savings into a rollover IRA. Congratulations, you’ve just made one of the best moves you’ll ever make in your retirement planning. A rollover IRA has far better investment options than a 401k plan and generally also has far lower costs.
But now that you’ve made the move, you still need to figure out where your rollover IRA fits into your overall retirement plan and, specifically, what stocks to buy.
As I wrote in What Should You Put In Your Rollover IRA, due to tax and other considerations, it makes a lot more sense to put certain kinds of investments in your rollover IRA.
In a nutshell, a stock that gets a large chunk of its total expected return from current income is usually a good choice for a rollover IRA, as are “special” situations like precious metals.
Today, we’ll go through some of the best stocks to buy for your rollover IRA.
Stocks to Buy for Your Rollover IRA: SPDR Gold Trust (EFT) (GLD)
I’ll start with the SPDR Gold Trust (ETF) (GLD), which owns physical gold.
Now, before I go any further, I should make it clear that I don’t necessarily recommend precious metals within your asset allocation. In fact, I would go so far as to say I don’t recommend them at all. But I also know that a lot of readers are believers in precious metals, and in gold in particular. So rather than fight you on this, I’ll just teach you how to do it smartly.
Precious metals — and exchange-traded funds backed by them — are not taxed like other investments. Instead, they are subject to a special 28% “collectibles” tax rate.
I realize that is absurd — we’re talking about a generic gold ETF, not your grandfather’s beloved Civil War coin collection. But there is no difference in the eyes of the IRS. So if you’re going to own GLD in a financial account, you might as well own it in your rollover IRA.
Stocks to Buy for Your Rollover IRA: iShares Silver Trust (ETF) (SLV)
The same goes for the iShares Silver Trust (SLV), which holds physical silver. If you sell SLV for a long-term capital gain, you don’t get to enjoy the preferential long-term capital gains tax rate of 15%-20%. No, you get hosed with the special 28% “collectibles” tax rate.
Yes, as far as the IRS is concerned, a silver ETF is no different than your grandmother’s fine antique silverware.
Again, I’m not the biggest fan of gold and silver ETFs. To the extent you own gold or silver, I’d recommend owning it in physical form and … ahem … off the books. If you’re owning it as a zombie apocalypse hedge, you don’t necessarily want anyone to know you have it.
But if you insist on owning silver as an ETF, then be smart and own it in your rollover IRA.
Stocks to Buy for Your Rollover IRA: Prospect Capital Corporation (PSEC)
Moving into more mainstream holdings, we get to one of my favorite value plays, Prospect Capital Corporation (PSEC).
Prospect is a business development company, which by definition means it pays a fat dividend — in order to maintain their tax-free status, business development companies are required to distribute the vast majority of their profits as dividends.
This makes them woefully tax inefficient to own in a regular brokerage account. But it makes them absolutely perfect for a rollover IRA.
At current prices, Prospect sports a dividend yield of 14%. But if owned in a rollover IRA, you can collect and reinvest that dividend tax-free in additional shares. That means major compounding over time … and more shares available to pay dividends when you decide you need the current income.
Stocks to Buy for Your Rollover IRA: Main Street Capital Corporation (MAIN)
Along the same lines, we have Main Street Capital Corporation (MAIN). Like Prospect Capital, Main Street is a business development company, which means it is exempt from federal income tax so long as it pays out 90% of its profits in the form of dividends.
But that dividend income can seem less attractive when you have to pay personal income taxes on it. This makes a rollover IRA an ideal home for a business development company. As the investor, you have the income shielded at both the corporate and the individual level.
Main Street isn’t quite the deep-value opportunity that Prospect Capital is. Its dividend yield is more modest at about 7%. But Main Street has also been a steady dividend grower, and it doesn’t have some of the baggage that Prospect Capital has. (Investors have never forgiven PSEC’s management for cutting the dividend back in 2014 and for routinely issuing shares at below NAV.)
All in all, Main Street would make a decent addition to your Rollover IRA.
Stocks to Buy for Your Rollover IRA: iShares iBoxx $ High Yield Corporate Bond (HYG)
When it comes to high-yield bonds, I feel like a father lecturing his teenage son about the dangers of alcohol. “It’s better not to drink when you’re underage, but if you’re going to do it anyway, at least be smart and don’t try to drive home.”
I don’t recommend you buy high-yield junk bonds or junk bond ETFs like the iShares iBoxx $ High Yield Corporate Bond (HYG), and I’m particularly wary of them at today’s prices. But if you’re going to do it anyway, at least be smart about where you buy them.
Bond interest is taxed as ordinary income at your marginal rate, so if you’re in one of the higher tax brackets, you’re giving nearly half of it to the IRS. For this reason, you’d be smart to own any high-yield bonds or bond ETFs within the tax-free confines of a rollover IRA.
Stocks to Buy for Your Rollover IRA: Senior Housing Properties Trust (SNH)
Few companies in the world have better demographic tailwinds supporting them than Senior Housing Properties Trust (SNH). America’s Baby Boomers are aging rapidly, and Senior Housing is there to meet their needs.
Despite its name, Senior Housing is not a “pure play” on the senior housing market, since 29% of SNH’s portfolio is invested in independent living facilities with another 23% in assisted living. Medical office buildings make up 42% of the portfolio. And importantly, 97% of Senior Housing’s net operating income comes from private-pay properties; exposure to Medicare is minimal.
As a REIT, Senior Housing escapes federal taxation so long as it dishes out virtually all of its income as dividends. And even by REIT standards, Senior Housing’s yield is fat at 9.3%.
Senior Housing’s stock price has lagged its peers for a long time. When you buy this REIT, you do so with the understanding that most of your return will coming from the dividend. And by holding Senior Housing in a rollover IRA, you can avoid having to share that dividend with Uncle Sam.
Stocks to Buy for Your Rollover IRA: Stag Industrial Inc (STAG)
One of my very favorite REITs — and one I own personally — is small-cap REIT Stag Industrial Inc (STAG). I don’t like my REITs to be sexy. I find that REITs with a comely growth story tend to be risky and have a higher probability of blowing up on me. I prefer boring, homely REITs that own low-prestige workhorse properties that throw off a lot of solid rental income.
Stag fits the bill. This REIT owns primarily light industrial and logistical properties that you’re unlikely to ever notice as a consumer. But as an investor, you can’t help but notice STAG’s 7.3% yield.
Stag Industrial also pays its dividend monthly, which is a nice touch, and has had a nice run of raising its dividend at least annually.
STAG is a small-cap stock, so be sure to use a limit order if buying a large block of shares. But if you’re planning to reinvest your dividends and hold STAG as a long-term compounder, then it makes all the sense in the world to hold Stag Industrial in a rollover IRA.
Stocks to Buy for Your Rollover IRA: BP Plc (ADR) (BP)
The last year has been a volatile one, but nowhere is this truer than in the energy sector. And non-U.S. energy majors have gotten hit even harder than their American brethren.
This brings me to British supermajor BP Plc (ADR) (BP). BP has had a rough couple of years. No sooner had it put the 2010 Gulf of Mexico oil spill behind it than it got dragged down by the worst bear market in crude oil in decades.
But as BP’s share price has gotten battered, its dividend yield has soared. Today, BP yields a juicy 7.9%.
Now remember, BP is a regular, good-old-fashioned common stock. It’s not a special tax-exempt vehicle like a REIT or a business development company. So when you see a high yield like that, you rightly ask whether the dividend is sustainable.
In the case of BP, I would say that the dividend is probably safe. Management has said that they are willing to take on additional debt and sell off large assets in order to maintain the dividend. That may or may not be wise, but it definitely shows commitment. So if you’re buying BP for the dividend, you might as well get it tax free via your rollover IRA.
Stocks to Buy for Your Rollover IRA: Cohen & Steers REIT/Pfd Inc Fund (RNP)
I’m a big fan of closed-end mutual funds. Unlike their more common open-ended brethren, which always sell at net asset value, closed-end funds often trade at deep discounts or wide premiums.
You should never buy a closed-end fund at a wide premium. If you do, you really deserve the capital losses that are likely to come your way.
Yet buying these funds at a discount is a very different story. Who wouldn’t want to own a dollar for 84 cents?
That’s where we are today with the Cohen & Steers REIT/Pfd Inc Fund (RNP). RNP owns a solid portfolio of REITs and preferred stock … and you can buy that portfolio at a 16% discount to net asset value. You can also enjoy a nice dividend yield of 8.1%. Not too shabby!
Due to the fat dividend yield, RNP is an ideal holding for your rollover IRA.
Stocks to Buy for Your Rollover IRA: iShares Mortgage Real Estate Capped ETF (REM)
And finally, I give you the iShares Mortgage Real Estate Capped ETF (REM).
Mortgage REITs, like their equity REIT brethren, get to avoid federal taxation and thus tend to pay large dividends. Yet mortgage REITs are a very different animal. You should expect decent long-term capital gains from equity REITs due to price appreciation of the underlying properties in the portfolio. But mortgage REITs don’t own appreciating properties … they own paper mortgages that amortize over time.
So, given that essentially all of your long-term gains come from current income, mortgage REITs are a natural choice for your rollover IRA.
REM gives you nice, diversified exposure to the mortgage REIT sector, which, as a group, is trading at some of the deepest discounts to net asset value in history. At current prices, REM yields an impressive 12.3%.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing he was long PSEC, STAG, BP and RNP.