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I study billionaires for a living. To be more specific, I study how these investors generate such huge and consistent profits in the stock markets -- year-in and year-out.
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Below is a selection from dioceses that make disclosures:Archdiocese of Boston:Held $4.6 million in energy stocks in 2014, equal to 5.9 percent of its equities holdings. In total, the archdiocese had $190.9 million in investments, 60 percent of which was in equities, with much of the rest in fixed income. Archdiocese of Chicago:Under 8 percent of the archdioceses $1.65 billion portfolio was invested in fossil fuels in 2014, according to a spokeswoman. That included some $18.7 million in energy and commodities alternative investments held through hedge funds and limited partnerships. The archdiocese did not provide a breakdown of its equities holdings. Diocese of Rockville Centre (Long Island):Held $6.3 million in energy company shares, representing 8 percent of its equities holdings in 2013. The diocese had a total $220 million invested, of which $80 million was in equities. Archdiocese of Baltimore:Held $6.9 million invested in commodities and natural resources in 2014, representing 6.3 percent of its overall $110 million portfolio. Diocese of Toledo Held $52.2 million in mutual fund investments in 2014. According to an asset allocation summary issued by the diocese in January 2015, the holdings include Samp;P500 energy companies through mutual fund World Asset Management and companies like BP, Royal Dutch Shell, Suncor, Exxon, Chevron, and CNOOC through funds offered by DFA. Minnesota:The Catholic Community Foundation of Minnesota, which invests for Catholic dioceses in Minnesota, reported investments totaling $260.2 million in 2014, $18.6 mln of which was in the energy-heavy Prudential Jennison Natural Resources Fund. That's about 7 percent of its portfolio. Samp;P 500 index: Energy makes up 7.1 percent of the Samp;P 500 index.Sources: annual financial reports. (Reporting by Richard Valdmanis; Editing by Mary Milliken)
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Submitted by Sizemore Insights as part of our contributors program
5 Investments Best Held in an IRA
by Charles Lewis Sizemore, CFA
It's not how much you make that ultimately matters in wealth accumulation but how much you keep, and the amount of your gains that get lost to taxes are a major factor in your realized returns.
Thankfully, you don't have to be a millionaire with an army of lawyers to effective game the tax code. Even the basic tools available to every American taxpayer, such as IRAs and Roth IRAs, can be wildly effective in lowering your tax burden and compounding your wealth at a much faster rate.
But as wonderful as an IRA or Roth IRA can be as a tax-free accumulation vehicle, we're limited to contributions of just $5,500 per person per year ($6,500 if you are aged 50 or older). And worse, your ability to contribute to a Roth IRA gets phased out at higher income levels. So, if you're aggressively saving for retirement, you're going to have a large portion of your savings invested outside of an IRA or Roth IRA and subject to ravages of taxation.
This means we have to pick and choose which investments we put in our IRA or Roth IRA. And choosing poorly here can make a big difference to the lifestyle you can afford in retirement.
What Not to Buy in an IRA
Let's start with what you shouldn't put in an IRA or Roth IRA. Most obviously, this would include tax-free securities like municipal bonds. Any investor stupid enough to waste precious IRA funds on tax-free muni bonds should be taken out back and shot. Or at least sterilized.
The same is true of MLPs and other "special" stocks that create tax complications. Because MLPs can generate unrelated business taxable income ("UBTI"), they can create bizarre tax situations in which your IRA has to file its own tax return and pay taxes. And looking at the bigger picture, given that most MLP distributions are indefinitely tax deferred, there is no benefit to placing them in an IRA or Roth IRA. You're effectively wasting precious IRA dollars.
Casting the net a little wider, I would say the same about tax-efficient index mutual funds or ETFs you intend to hold for the long-term.
There's just no point in putting them in an IRA. Portfolio turnover is minimal in index funds, so they generate very little in taxable income other than the dividend yield, which these days amounts to all of 2%. Plus, once you sell the funds to pay for your retirement expenses, you're going to be paying ordinary income tax rates on the full amount of the funds withdrawn from an IRA, whereas you'd be paying the long-term capital gains tax rate on just your capital gains on a taxable mutual fund or ETF investment. (You wouldn't pay taxes on monies withdrawn from a Roth IRA, but my point stands.)
Now that we've gotten that out of the way, we can talk about what makes a solid IRA investment. Ideally, you should prioritize for your IRA or Roth IRA any investment that gets a large chunk of its total return from current income. And specifically, it should be current income that does not benefit from special tax rates, such as qualified dividends taxed at the preferential 15% and 20% rates.
So with no more ado, let's jump into the five best IRA investments.
Business Development Companies
Business development companies ("BDCs") are an interesting niche of the market. They essentially do what banks used to do back in the good ol' days before the 2008 crisis: Lend money to up-and-coming businesses.
The tax code gives a nice bonus to BDCs. In order to encourage them to provide funds to capital-starved young businesses, all profit is tax free at the corporate level . . . so long as they distribute at least 90% of it as dividends.
As BDCs are unable to retain much of their earnings for future growth, a large chunk of the total returns to investors comes from the dividend. Many BDCs yield well in excess of 10%. That alone would make them an ideal IRA investment. But that's not where the story ends.
The taxability of BDC dividends will vary from company to company, but the dividend will generally be some combination of lower-taxed "qualified" dividends, higher-taxed unqualified dividends and tax-deferred return of capital. Typically, the biggest chunk of the dividend is considered non-qualified and taxed as ordinary income, making BDCs woefully tax inefficient. This makes them particularly well suited for an IRA or Roth Ira.
I'm a fan of BDCs under the right conditions, and I made a BDC my pick in this year's Best Stocks contest. Prospect Capital (PSEC) trades at a deep discount to book value and pays a fantastic 14% dividend yield. Thus far, the stock has had a rough 2015, though I expect it to finish the year strongly. I also consider it an outstanding IRA investment . . . and happen to own it in my own IRA.
Equity Real Estate Investment Trusts
Along the same lines we have equity REITs. Equity REITs have one of the simplest business models out there. They buy or develop real estate, lease it out, and collect the rent. As with BDCs, REITs pay no taxes at the entity level...so long as they pay out 90% of their net income in the form of dividends.
Though REITs are considered to be long-term growth vehicles, they also get a high percentage of their total return as income. But as far as tax treatment goes, REITs tend to get punished even harder than BDCs. In any given year, some portion of a REITs dividend may be classified as capital gains distribution or as a tax-free return of capital. But the lion's share of the payout will generally be a non-qualified dividend taxed as ordinary income.
One REIT I hold in my IRA that I am unlikely ever to sell is "the monthly dividend company" Realty Income (O).
Realty Income has paid 540 consecutive monthly dividends and has increased its dividend for 71 consecutive quarters. At current prices, it yields about 5%.
Mortgage Real Estate Investment Trusts
Even less tax efficient than equity REITs would be their cousins, mortgage REITs.
Like equity REITs mortgage REITs avoid taxation at the company level so long as they distribute 90% of their profits as dividends. But mortgage REITs are even more dependent on their dividends for their total returns than equity REITs, as there is virtually no long-term growth component. Equity REITs hold properties that are presumed to rise in value over time. Mortgage REITs hold mortgages...while are eventually paid off or refinanced.
Many mortgage REITs, including blue chips like Annaly Capital (NLY), pay dividends well in excess of 10%. And virtually all of it is going to be taxed as regular income. This makes a mortgage REIT a very obvious choice as an IRA investment.
Mortgage REITs have been slammed in 2015 by fears that a Fed rate hike would raise borrowing costs and crimp profitability, and today many mortgage REITs trade for just 80%-90% of book value. At these prices, they would seem to be a low-risk bargain.
Personally, I think you would have to be crazy to own bonds at today's yields. I am about as close to a "bond bull" as you are likely to find these days because I believe that long-term yields will stay low for a long time to come. But that is hardly a rousing endorsement. At current yields, you're locking in returns of, at best, 2.2% in 10-year Treasuries, and high-quality corporate bonds don't yield much better. In my view, you're much better off trying your luck with high-quality dividend-paying stocks.
Nevertheless, some investors crave the safety and predictability of bonds. And if you are going to invest in bonds, then by all means, you should protect your modest income stream by placing them in an IRA.
Bond interest is taxed as ordinary income, and bonds get virtually all of their returns in the form of current income if held to maturity. This makes them an extraordinarily tax inefficient investment...and a perfect IRA investment.
And finally, we get to precious metals. I don't consider previous metals an "investment," per se. In my view, you keep a few gold coins around for the same reason you keep a gun: As "insurance" in the event that things really got bad. (Yes, my true Texas colors are starting to come out.)
So, I personally would never keep a position in gold or any other precious metal in an IRA. In the event I actually needed gold, I would want it physically in hand. But I also realize that my views a little eccentric here. Plenty of investors consider precious metals a viable asset class and allocate a portion of their portfolio to it in the form of a metal-backed ETF such as the SPDR Gold Trust (GLD) or the iShares Silver Trust (SLV).
If you are one of those investors, keep your precious metals investment in an IRA. Metals are considered "collectibles" for tax purposes, and gains are taxed at a 28% tax rate rather than the usual 20% capital gains rate.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
Photo credit: 401(K) 2012
This article first appeared on Sizemore Insights as 5 Investments Best Held in an IRA