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Rick D

Rick D
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  • New Shell CEO Takes Out The Trash [View article]

    A shares are Netherlands-based. For US-based investors, the dividends have 15% Dutch tax withheld from them.

    B shares are UK-based and per the US-UK tax treaty there is no withholding tax on dividends for US-based investors.

    In a tax-deferred or tax-exempt account such as an IRA you should own B shares. This is because you cannot practicably recover the Dutch withholding tax in an IRA.

    In a taxable account, investors who can recover most or all of the Dutch withholding via the foreign tax credit should own A shares because they are cheaper.

    Small investors in taxable accounts who pay less than $300 in foreign taxes from all sources (not just Shell withholding) each year ($600 if married filing jointly) can usually easily recover 100% of the Dutch withholding via a single line item entry for the Foreign Tax Credit on Form 1040. (Exceptions are taxpayers subject to AMT and taxpayers with less than $300/$600 in total US tax.) Investors who get 100% recovery via this method should own A shares.

    Investors with more than $300/$600 of foreign taxes from all sources must file Form 1116 to claim the foreign tax credit and may have their recovery limited. With a 5% differential in pricing between A and B shares, investors in taxable accounts who can recover at least 2/3 of the Dutch tax withheld should own A shares; those whose recovery is less than 2/3 should own B shares.
    Aug 15 03:12 PM | 2 Likes Like |Link to Comment
  • New Shell CEO Takes Out The Trash [View article]

    When you signed up to DRIP your Shell shares, Fidelity signed you up for Shell's corporate DRIP, the Scrip Dividend Programme, which for tax and legal reasons beyond the scope of a comment issued only A shares regardless of the class of shares held by the shareholder. Shell recently discontinued the Scrip Dividend Programme. Since Shell no longer has a corporate DRIP, I would guess that you will be enrolled in Fidelity's brokerage DRIP and you will receive B shares in the future. You might want to double-check with Fidelity to be sure.
    Aug 14 07:25 PM | 1 Like Like |Link to Comment
  • Statoil Results Show The Price Of Value [View article]

    Yes, there is a Norway/US tax treaty. US individual investors in Statoil's ADRs have 15% withholding on dividends by Norway provided that their broker properly registered their shares as an individual with the depositary. Non-individual investors (including individual holdings through brokerages that do not properly register shares individually through the depositary) have 25% withheld from dividends by Norway.

    I use Vanguard and have 15% withheld on my STO dividends.

    This issue was discussed in the comments on these two SA articles on Statoil:

    I agree that STO is a very good company; in fact, I just added to my already large position yesterday. Their exploration results over the past 2 years have been astoundingly good. Bay du Nord, offshore Tanzania, and Johan Sverdrup are all huge resources that will most likely pan out very well for Statoil over the next decade or so. But Wall Street only cares about the current quarter, and in my opinion that's what makes STO an outstanding value right now for a patient long-term investor.
    Jul 29 04:26 PM | Likes Like |Link to Comment
  • Finding Value And Safety In Two 6% Yield Plays [View article]

    I take it you are a newcomer to MLPs. Let's start with some basic terminology. MLPs aren't stocks. They don't issue shares, they issue units. They don't pay dividends, they pay distributions. The differences are NOT academic, especially come tax time.

    When you own shares in a corporation, you have ownership of a small portion of the company as a whole. By contrast, when you own units of a partnership, you directly own a fraction of the assets of the company. In the case of TGP, you directly own a portion of each ship that TGP holds and of each contract that TGP enters into on your behalf. There is no corporate "shield" between you and those assets and contracts.

    Like most MLPs, TGP pays out nearly all of its "distributable cash flow".
    DCF is essentially all the cash that the partnership takes in minus all the cash it pays out in the conduct of its operations. Nothing is subtracted out for non-cash items like depreciation. By contrast, GAAP earnings subtract out non-cash items like depreciation and amortization.

    How can TGP sustain a $2.77 distribution? Simply put, it takes in that much net cash each year. Of course, each year its ships get older, and when they are 35 or 40 years old they will most likely be scrapped for a fraction of their original value. If TGP never bought any new ships, after 40 years or so the partnership would be dissolved and you'd only receive the scrap value of your ships, which would almost certainly be much less than the original value of the units you purchased. In effect, a portion of TGP's distribution represents a return of your original investment capital equal to the diminution of value of your share of TGP's ships.

    GAAP earnings are typically not very meaningful for MLPs because GAAP tends to be overly conservative about depreciation. MLPs are usually capital-intensive with long-lived assets. GAAP typically assumes that MLP assets will be worn out and worthless long before they actually are.

    In TGP's case, their fleet is relatively new. If we assume the ships will be scrapped in 35 years for 30% of their initial value, and we assume straight-line depreciation, that works out to 2% depreciation per year. Using these assumptions, one can subtract 2% from the distribution yield to get the "real" yield that a similar company organized as a corporation might pay out. This kind of analysis can be useful for making apples-to-apples comparisons of MLPs with dividend-paying stock corporations.

    It is normal for MLPs to have a payout ratio of over 100% of GAAP earnings. There's nothing to be alarmed about here. But when you buy MLP units it's extremely important to understand exactly what assets you are buying and what their real useful life span is.
    Jul 20 04:19 PM | 1 Like Like |Link to Comment
  • Finding Value And Safety In Two 6% Yield Plays [View article]

    That's a good question. It depends on what you call a "small position" and it also depends on the partnership. Some are more difficult than others tax-wise.

    TGP is a relatively easy one. My tax preparer charges me less than $100 extra each year for the extra paperwork. It's also possible to handle TGP's K-1 yourself, even without tax software, though I'd recommend using a tax preparer for at least the first year.

    But TGP doesn't currently have operations in the US. Other MLPs such as pipeline companies can have more complicated tax issues. It is possible to owe state income tax in the states that the MLP has operations in. This could include all the states the MLP's pipelines pass through. The states generally have minimum thresholds for filing, however, so a small investor might not have enough income in a particular state to be required to file in that state.

    There are also issues that go beyond just the K-1. Since most MLP distributions include a partial return of capital, your basis will generally slowly go down over time. TGP will send you paperwork each year showing your total basis at the end of the year, so for TGP you won't have a lot of work to do keeping track of your basis. (To be on the safe side, though, I'd still hold on to all the K-1s for every year that you held the position until you discard the tax return for the year you sell.) If you sell your entire position at some point in the future, computing your capital gain will be pretty straightforward; however, selling only a part of your position introduces additional complications. If you're interested in having simpler taxes, it's fine to accumulate an MLP in dribs and drabs, but when it comes time to sell, I'd suggest doing it all in one shot.

    The above assumes you are investing in a taxable account. Many different issues arise if you put an MLP in an IRA.

    To answer your question "is it really worth all the extra paperwork?", in the case of TGP, the extra paperwork in my opinion subtracts about $100 worth of value each year. That should be a good rough guide as to whether or not it's worth it for a small position.

    Disclaimer: I'm not a tax advisor, just a TGP unitholder sharing my own experiences.
    Jul 19 07:56 PM | Likes Like |Link to Comment
  • Chevron Lacks Growth [View article]
    Some comments:

    For an oil and gas major, capex in the current quarter or year does not result in production growth in the current quarter or year. It results in production growth 5 - 10 years down the road. I see this mistake made over and over again in analyses of oil and gas majors, which is good for long-term investors such as myself as it results in mispricing. Chevron should have quite good production growth over that 5 - 10 year time frame. A patient investor is likely to be amply rewarded for a position in CVX.

    As the author states, Chevron's balance sheet is solid. At today's rock-bottom interest rates, why not borrow money for capex, as long as the money is intelligently spent? If you're looking 5 - 10 years down the road, who cares if the current quarter has negative free cash flow? I'll bet it won't be negative in 5 or 10 years!

    Other oil and gas majors are cutting back on capex to improve current results. Chevron is not. I don't see any letup in demand growth for hydrocarbons. Asia in particular should see high rates of demand growth. This could put Chevron in the catbird seat if demand growth is not matched by supply growth due to limited capex by the other majors.

    Disclosure: Indirectly long CVX via VDE/VENAX. Considering taking a direct long position in CVX.
    Jul 13 07:48 PM | 10 Likes Like |Link to Comment
  • Royal Dutch Shell Changes Rules, So Now What? (Part 2) [View article]
    I don't think FATCA will affect a typical US-based Shell shareholder. The depositary for US ADRs is Bank of New York Mellon. I'm sure they'll take care of any required paperwork affecting typical small holdings of Shell ADSs.
    Jun 26 09:17 PM | Likes Like |Link to Comment
  • Norway's government to retain big stake in Statoil [View news story]
    It's my understanding that the Norwegian government does not vote its shares, so they don't directly control or dictate the business policy of STO, at least not at present. Of course there's no guarantee they won't exert control in the future at some point.

    The pre-election proposal was to reduce the Norwegian government's stake to 51%, so they would still have had majority ownership under that proposal. From an investor's standpoint, today's announcement only affects the size of the float. It's somewhat of a non-event.
    Jun 23 12:33 PM | Likes Like |Link to Comment
  • Teekay LNG Partners, L.P. - Expensive At Current Prices? [View article]
    "I have a question about why the cash from JV operations isn't released to TGP, is it not paid until pay-out of the cost of building a ship? "

    Oilberta, that's a good question. I don't know the answer to it. Maybe in some cases it is released. That would be a good question to ask Teekay's Investor Relations department. If you find out the answer, please post a summary of it here so everyone can benefit.
    Jun 15 05:48 PM | Likes Like |Link to Comment
  • Choosing Which Royal Dutch Shell Share Class Is Right For You [View article]
    Just a brief note to let folks know that Shell has cancelled the Scrip Dividend Programme and so some of the information here is now out of date.

    I would suggest that readers interested in RDS.A and RDS.B also read the following article by Mike Nadel and its comments:
    Jun 15 05:33 PM | 2 Likes Like |Link to Comment
  • Choosing Which Unilever Share Class Is Right For You [View article]

    The RDS article is now somewhat out of date since Shell has cancelled the Scrip Dividend Programme. If you are interested in RDS, I would recommend you also read Mike Nadel's article and the comments on it here:
    Jun 15 05:14 PM | Likes Like |Link to Comment
  • A New High-Dividend Stock With Strong Future Dividend And Cash Flow Growth [View article]
    I did not know about Nord Stream. That is a major supply source for northern Europe. Thank you for bringing it to my attention.

    I was referring to a planned northerly overland route. Unfortunately I don't remember the specifics.

    I have heard of proposals to either build new pipelines going eastward from LNG import terminals on the Atlantic coast of Europe or to reverse existing pipelines to supply some of those countries now dependent on Russian gas. Obviously it will take time for any of these to come to fruition.

    Currently China is dependent on LNG and Europe is dependent on Russian gas. I expect that in the future China will add Russia as a supply source while Europe adds more LNG import capability. Under this scenario pricing for Russian gas and LNG would be similar because both China and Europe would have a choice of sources, while both Russia and LNG suppliers would have a choice of customers.

    I think you misunderstood my last point. I wasn't referring to a near-term scenario of Europe refusing to buy Russian gas. That is an interesting scenario but as you said earlier it is unlikely to happen, and yes, Russia would probably retaliate with trade sanctions of their own if that happened. I was referring to Russia selling gas to China instead of Europe, either for political purposes or more likely because they could get more money for the gas by selling it to China. There would then be a money flow from Europe to China for Chinese goods, from China to Russia for gas, and from Russia to Europe for BMWs and Mercs, completing the cycle. I should have been clearer on that last point.
    Jun 11 02:55 PM | Likes Like |Link to Comment
  • A New High-Dividend Stock With Strong Future Dividend And Cash Flow Growth [View article]

    It wouldn't require a full-fledged war for the gas supply from Russia to be cut. Russia has cut gas supplies to eastern Europe before over price disputes. Also, there is currently only one major pipeline from Russia to most of Europe, and it goes through Ukraine. Any disruption to this pipeline for whatever reason, even just a technical problem, would interrupt the westward flow of gas. (I understand a second pipeline on a more northerly route is being constructed to alleviate this concern, but it won't be in service for awhile.)

    Your last paragraph is interesting. I did not know about the balance (or imbalance) of trade between Russia and Europe. But if Russia sells gas to China instead of Europe, they'll still have money to buy BMWs, it'll just come from China. And China exports to Europe, so they'll have money to buy Russian gas. So when the new pipelines to China are constructed Russia won't have to sell gas to Europe if it doesn't want to.
    Jun 11 09:41 AM | Likes Like |Link to Comment
  • Royal Dutch Shell Changes Rules, So Now What? (Part 2) [View article]
    Mike, you raise an important point here.

    An investor's goal shouldn't be to beat the market, or even to match the market's return, but rather to meet his/her own personal financial goals and needs.

    "There isn't an index or an ETF that can accomplish [my income-related goal]."

    I know others have raised this in the past, but it's a mystery to me why there are, at least to my knowledge, no funds that could be used to meet your goal. There are certainly many others like you who are seeking a decent, stable income stream (say, a 3.5% or so overall yield from quality names) that can be expected to grow roughly in line with inflation. There would be a huge market for such a fund.

    If I counted correctly, you have 42 names in your portfolio. That would make a nice mutual fund. Semi-seriously, have you considered becoming a portfolio manager?
    Jun 9 01:35 PM | 2 Likes Like |Link to Comment
  • Royal Dutch Shell Changes Rules, So Now What? (Part 2) [View article]
    Mike, you're a member of the Ifida Club, which includes every investor on Wall Street. "Ifida bought this." "Ifida sold that." "Ifida just held on!"

    (No, I didn't coin the "Ifida Club" term. I read it in the Wall Street Journal decades ago!)

    One thing I learned a long time ago is that you're never going to buy at the bottom or sell at the top, and you shouldn't try to. If the price is right, just buy the stock. Don't worry that it was cheaper in the past or that it goes down after you buy. That almost always happens! Just buy it knowing that you got a good price and don't worry if there was or will be a better price. The same goes for selling. I've had so many stocks skyrocket after I sold them that I almost expect it now. If it was significantly overpriced and I sold it, I know I did the right thing and I don't worry about what happens to it later.

    Also you should never buy a stock that isn't appropriate for your circumstances. If you need conservative investments you shouldn't invest in high flyers. If someone else makes a killing on them, good for them, but don't have regrets that you didn't buy them.
    Jun 9 12:37 PM | 6 Likes Like |Link to Comment