For those income investors looking to reduce their tax burdens, here are some tax-efficient picks for 2024. If you weren’t aware, Real Estate Investment Trusts (REITs) are generally exempt from corporate income taxes, and their high dividends can be classified as ordinary income, capital gains, or return of capital, each with different tax implications.
Master Limited Partnerships (MLPs), on the other hand, also enjoy pass-through taxation, so they don’t pay federal income tax at the entity level. Analysts consider significant portion of the distributions from MLPs to be a return of capital. This generally allows taxes to be deferred until those MLP units are sold.
As always, it’s a wise idea to consult with a taxation specialist before purchasing units in a REIT or MLP. But for those who have already received the appropriate advice and are looking for more tax-efficient picks for this year, then here are my recommended options.
Realty Income (O)
Realty Income (NYSE:O) is a REIT known for its strong track record of providing consistent monthly dividends.
Now might be a great time for income investors to pick up shares of O stock following its merger with Spirit Realty Capital. The reason that the merger is considered a bullish sign is that the combined company’s financial performance is expected to improve.
On a high level, it consolidates two major players in the fragmented net lease space into one, which is anticipated to be accretive for investors.
Wall Street considers Realty Income a “Buy.” It has given it an upside of 12.38% for its share price to be reached within the next 12 months.
Enterprise Products Partners (EPD)
Enterprise Products Partners (NYSE:EPD) is another one of those tax-efficient picks for 2024. Unlike O, EPD is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services.
However, EPD has one crucial advantage over other MLPs in the energy commodities space. The energy market is notoriously cyclical and volatile. The gyrations in supply and demand, climate, seasonality, geopolitics and many other factors can cause this volatility. This can then lead to boom and bust cycles, which may leave some investors feeling on edge.
EPD shines because it is less dependent on fluctuating commodity prices. It primarily earns revenue through fees charged to other companies for using its infrastructure.
In addition to this operational advantage, EPD also has an attractive dividend yield of 7.61%. The company also has a dividend growth rate of 5.25%.
Digital Realty Trust (DLR)
Digital Realty Trust (NYSE:DLR) is a REIT with a somewhat different business model. At least, it is different form what most investors are used to. Instead of residential houses or commercial office buildings, its tenants use data centers and colocation facilities.
I’m especially fond of DLR due to what I expect to be an exponential rise in the use of data centers. These facilities hold all the needed network infrastructure for keeping online applications up and running. This makes them a fundamental part of many of the trends powering the stock market today. This includes AI, cloud computing, Internet of Things (IoT), and many others.
DLR currently has a dividend yield of 3.51%, but I believe it’s still early days for this REIT. Its share is also up 29.93% over the past year and 33.45% over the past five years. Investors could get a good blend of income and capital appreciation assuming that these numbers hold up in the future.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
