The Ultimate Dividend Portfolio

There's no better place to hold dividend-paying stocks than in the confines of a retirement account, Fool contributor Tim Beyers says in the following video.

Why? Taxes. Each time you receive a dividend -- or a distribution from a publicly traded partnership or real estate investment trust, or REIT -- you're receiving income that can be taxed. That's true even if you reinvest the dividends to buy new fractional shares in the company paying you. (Pro tip: Many brokerages provide dividend reinvesting as a free service!)

As such, Tim says investors might do best to use a retirement accounts such as an IRA or a self-directed 401(k) to invest in dividend payers. You'll enjoy deferred taxes on all distributions, which means you can reinvest 100% of the proceeds in pursuit of ever-higher levels of income. Tim says following this very strategy has allowed him and his wife to develop a long-term position in Prospect Capital that, today, pays a better-than-20% effective yield.

He advises those just starting their pursuit of dividend payers to take a closer look at American Tower (NYSE: AMT  ) , a Rule Breaking REIT whose principal business is to construct towers that host wireless radios for distributing cell service and other forms of broadband to areas that need it. How big is the opportunity? More than 4 billion people remain disconnected from the Internet as of this writing, a huge gap that American Tower can help to bridge.

Now it's your turn to weigh in. Which stocks are in your dividend portfolio? Please watch the video for Tim's full take and then leave a comment to let us know what you think.

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  • Report this Comment On February 04, 2014, at 3:29 PM, tombland wrote:

    Tim, with regards to your wife's IRA and Prospect Capital, you said that their dividends have been reinvested and therefore "never once kicking off a taxable event" – but as it's an IRA, those distributions wouldn't be taxable anyway until withdrawals begin to be made from the IRA – am I right? Could you clarify please? I've recently moved to the US and am about to get my Roth IRA up and running and Prospect is certainly on my radar. I'm just not sure whether to elect to receive their dividends as cash or have them automatically reinvested back into Prospect. Any advise would be great...

  • Report this Comment On February 04, 2014, at 5:55 PM, TMFMileHigh wrote:

    @tombland,

    >>Tim, with regards to your wife's IRA and Prospect Capital, you said that their dividends have been reinvested and therefore "never once kicking off a taxable event" – but as it's an IRA, those distributions wouldn't be taxable anyway until withdrawals begin to be made from the IRA – am I right?

    Yes, that's right. We would have been forced to pay taxes on Prospect distributions had we held the stock in a taxable account.

    >>I'm just not sure whether to elect to receive their dividends as cash or have them automatically reinvested back into Prospect. Any advise would be great...

    Tougher call. I chose to reinvest for three reasons:

    1. I believe that Prospect can and will continue to make good investments and produce above-average returns on capital.

    2. I'm trying to build a sustainable portfolio of payers that grow yields over time.

    3. Fidelity makes dividend reinvesting free.

    Not sure if that answers your question. Maybe consider your investing goals first? Then, see if reinvesting can realistically help you achieve them.

    Thanks for writing and Foolish best,

    Tim

    --

    TMFMileHigh in CAPS and on the boards

    @milehighfool on Twitter

    http://about.me/timbeyers

    http://timbeyers.me

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