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rlp2451
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  • Are MLPs Worth the Trouble?
    After numerous recent discussions on Yahoo MLP boards, I came to the conclusion it might be better off if MLPs ARE taxed like other companies and the so-called 'pass through' exemption is eliminated.  I calculated holding one share (unit) of a $10 MLP, distributing 10%/year, with distributions growing at 10%/year. (Generous obviously, but it makes the calculations easier).

    If the current law stays as is, you will get to a zero cost basis at year 8 (give or take a month or so).  My assumption is that the tax rate will increase to 25% anyway at year 8 (again for the sake of argument).

    If you put the distibutiions back into the original share, at year 15 you would have 2.92 shares, or almost tripleing your money (again under the current tax laws).

    If you decide to sell in the fifteenth year, you will have to pay taxes on the whole 2.92 shares.

    However, if you pay a 15% tax now, and still compound shares, you wind up having 2.82 shares - a mere .10 share less - but you only have to pay taxes on 1.82 shares since your original cost basis can be subtracted from the amount.You sind up with more shares and less taxes!

    The spreadsheets are posted below. Please tell me where I am in error!

    First page - Current tax scheme:

    YearCostDistribution RateDistribution AmountAdjusted CostTax AmountTax RateNet ReturnCumulative ReturnCompound Return
    110.00000.10001.00009.00000.00000.15001.00001.000011.0000
    29.00000.10601.06007.94000.00000.15001.06002.060012.0600
    37.94000.11241.12366.81640.00000.15001.12363.183613.1836
    46.81640.11911.19105.62540.00000.15001.19104.374614.3746
    55.62540.12621.26254.36290.00000.15001.26255.637115.6371
    64.36290.13381.33823.02470.00000.20001.33826.975316.9753
    73.02470.14191.41851.60620.00000.20001.41858.393818.3938
    81.60620.15041.50360.10250.00000.20001.50369.897519.8975
    90.10250.15941.5938-1.49130.39850.25001.195411.092921.0929
    10-1.49130.16891.6895-3.18080.42240.25001.267112.360022.3600
    11-3.18080.17911.7908-4.97160.44770.25001.343113.703123.7031
    12-4.97160.18981.8983-6.86990.47460.25001.423715.126825.1268
    13-6.86990.20122.0122-8.88210.50300.25001.509116.636026.6360
    14-8.88210.21332.1329-11.01510.53320.25001.599718.235728.2357
    15-11.01510.22612.2609-13.27600.56520.25001.695719.931329.9313
         3.3446 19.9313  
    Sell share(s) year 15:         
    Adjusted cost basis 0.0000       
    Current Basis: 29.9313       
    Tax Rate 0.2500       
    Tax Amount 7.4828       
    Net Amount: 22.4485       
    Less original cost 10.0000       
    Gross Net: 12.4485       

    Second page: Pay-as-you-go:
    Year
    Cost
    Distribution Rate
    Distribution Amount
    Adjusted Cost
    Tax Amount
    Tax Rate
    Net Return
    Cumulative Return
    Compound Return
    1
    10.0000
    0.1000
    1.0000
    9.0000
    0.1500
    0.1500
    0.8500
    0.8500
    10.8500
    2
    9.0000
    0.1060
    1.0600
    7.9400
    0.1590
    0.1500
    0.9010
    1.7510
    11.7510
    3
    7.9400
    0.1124
    1.1236
    6.8164
    0.1685
    0.1500
    0.9551
    2.7061
    12.7061
    4
    6.8164
    0.1191
    1.1910
    5.6254
    0.1787
    0.1500
    1.0124
    3.7184
    13.7184
    5
    5.6254
    0.1262
    1.2625
    4.3629
    0.1894
    0.1500
    1.0731
    4.7915
    14.7915
    6
    4.3629
    0.1338
    1.3382
    3.0247
    0.2676
    0.2000
    1.0706
    5.8621
    15.8621
    7
    3.0247
    0.1419
    1.4185
    1.6062
    0.2837
    0.2000
    1.1348
    6.9969
    16.9969
    8
    1.6062
    0.1504
    1.5036
    0.1025
    0.3007
    0.2000
    1.2029
    8.1998
    18.1998
    9
    0.1025
    0.1594
    1.5938
    -1.4913
    0.3985
    0.2500
    1.1954
    9.3952
    19.3952
    10
    -1.4913
    0.1689
    1.6895
    -3.1808
    0.4224
    0.2500
    1.2671
    10.6623
    20.6623
    11
    -3.1808
    0.1791
    1.7908
    -4.9716
    0.4477
    0.2500
    1.3431
    12.0055
    22.0055
    12
    -4.9716
    0.1898
    1.8983
    -6.8699
    0.4746
    0.2500
    1.4237
    13.4292
    23.4292
    13
    -6.8699
    0.2012
    2.0122
    -8.8821
    0.5030
    0.2500
    1.5091
    14.9383
    24.9383
    14
    -8.8821
    0.2133
    2.1329
    -11.0151
    0.5332
    0.2500
    1.5997
    16.5380
    26.5380
    15
    -11.0151
    0.2261
    2.2609
    -13.2760
    0.5652
    0.2500
    1.6957
    18.2337
    28.2337
     
     
     
     
     
    5.0423
     
    18.2337
     
     
    Sell share(s) year 15:
     
     
     
     
     
     
     
     
     
    Original Cost basis
     
    10.0000
     
     
     
     
     
     
     
    Current Basis:
     
    28.2337
     
     
     
     
     
     
     
    Adjusted cost basis
     
    18.2337
     
     
     
     
     
     
     
    Tax Rate
     
    0.2500
     
     
     
     
     
     
     
    Tax Amount
     
    4.5584
     
     
     
     
     
     
     
    Net Amount:
     
    13.6753
     
     
     
     
     
     
     
    May 17 10:13 AM | Link | 2 Comments
  • How to (Safely) Obtain a 6% Return with a Diversified Portfolio
    I recently received a fairly substantial - for me at least - amount of money that I did not need immediately, and instead wanted to get an income stream on a monthly basis.  The keys to any investment portfolio is diversification, and I believe you can diversify even if you are heavily weighted in one segment of the economy - in this case, utilities.  But more about that later.

    I used a screening program to filter out companies that yielded 4% or more, while leaning towards the higher end of the spectrum.

    Using a hypothetical $100,000 here are the equities I arrived at, investing approximately $10,000 in each:
    NameStockMonthy Div.Purchase PriceYield$/sh/yr# sharesTotal
    Vectren CorpVVC0.3426.895.041.3640010756
    Bristol MyersBMY0.3127.564.81.323008268
    VerizonVZ0.48537.225.21.9430011166
    Duke EnergyDUK0.2437518.175.320.975009085
    AT&TT0.24530.315.61.703009093
    PA Power & LightPPL0.3526.755.21.3940010700
    Gabelli Utilities AAAGABUX0.076.4812.380.8015009720
    Brookfield InvestmentBIP0.4223.035.471.264009212
    Atlantic PowerAT0.0914.657.411.0770010087
    iShares PreferredPFF0.2239.327.382.6430011796

    VZ, T, and PP&L all pay dividends in January, April, July and October.
    DUK and BIP pay in February, May, August and November
    VVC, BMY pay in March, June, September and December
    GABUX, AT and PFF pay monthly.

    Using this method, you get monthly payouts of $596 in January, April, July and October; $527 in February, May, July and October; and $472 in March, June, September and December, for an annualized yield of over 6%.

    Even though it is heavily weighted towards utilities, the companies listed are in different types of utilities and in different geographical areas: Electric (PPL, DUK); gas (NYSE:VVC); alternative energy (NYSE:AT); and a mutual fund (MUTF:GABUX).  The telecoms are similar but different (VZ, T); and threw in a drug company (NYSE:BMY) for it's high yield.  I could have easily gone with Eli Lilly (NYSE:LLY).

    The other two - BIP and PFF - are unique in their own right, and I suggest you do your DD before you invest.  But both have long histories of dividends, although PPF recently decreased theirs while BIP boosted.

    Overall, the downside risk is minimal, I believe, even if interest rates climb.  These companies' dividends are safe and even though capital appreciation may not be all that great, I think there is some potential for 4-5% in the portfolio as well.


    Tags: VVC, PPL, DUK, VZ, T, BMY, LLY, BIP, PFF, AT, Return, Dividends, Income
    Apr 19 11:15 AM | Link | 24 Comments
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