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I’m going to display my ignorance to a few of my most trusted friends…..
AGNC a REIT with a 4 yr history of 12-13% dividend payouts that currently pull out 98% of earnings, like most REITs.
Why doesn’t everyone flock to this stock?
One key tax factor about dividends paid on REIT’s is that such dividends are typically taxed as ordinary income and not as qualified dividends which are taxed at capital gains rates for federal purposes. Different states may also tax REIT dividends differently than federal methodology.
To the extent that a REIT distributes dividends in excess of it’s accumulated earnings, which is a common event with REITs, then the excess typically reduces your tax basis in the investment. The REIT may be just giving you back your own money with its high distribution rate and that may result in a headache for you keeping up with your tax basis if the REIT does not keep up with your basis over the years.
There can be further tax complexity if your REIT merges with another REIT which seems to happen a lot when a REIT is not performing well.
I favor the simplicity and lower capital gain tax rates on qualified dividends for my equity investments in my taxable investment accounts. I feel the same way about making investments in publicly traded partnership interests and REITs and I have intentionally avoided investing in either.
I’m glad you’re here, William. Thanks for this explanation.
Mortgage REITs, over the long run, have not done well. You will lose more in capital than you make in dividends. Sophisticated investors shun these stocks, which is why the price is low and the payout is high.
AGNC does not own buildings or generate earnings in the traditional sense. They own mortgage-backed securities and they borrow short-term to buy long-term securities to earn the spread. They are highly leveraged and even a small change in interest rates can change their value.
Investors demand a high yield to compensate for this risk.
Lots of red lights. Liquidity issues?
I haven’t studied this much, but dividends are typically variable and dependent on interest rates with mortgage REITs.