A list of tax-efficient funds for the non-qualified account.
These are especially handy if tax-free munis do not make sense, perhaps because you are already in a low tax bracket.
It's not what you earn, it's what you keep. These tables help you keep more by placing more efficiently-taxed funds in your non-qualified accounts.
(Please note that this was first published to members of Yield Hunting on October 15)
How To Read The Tables
The headers are a bit confusing, so I wanted to go through them briefly to help make the lists more useful.
Discount/Premium: The fund's current discount or premium as of the close of business
% QDI Last Year: The % of the distribution that is classified as qualified dividend income
% QDI Last 3 Years: The % of the distribution that is classified as qualified dividend income for the last 3 years, on average.
Distribution % Income - 1yr: The percentage of the distribution that is classified as income (whether ordinary income or qualified dividend income).
Distribution S-T Cap Gain - 1yr: The percentage of the distribution that is classified as short-term capital gain. Typically ordinary income rates.
Distribution L-T Cap Gain- 1yr: The percentage of the distribution that is classified as long-term capital gain rates. 15% or 20%.
Distribution RoC -1yr: The percentage of the distribution that is classified as a return of capital (basis) and is thus, not taxable in most cases.
To refresh, here is the definition of a qualified dividend according to Schwab:
Qualified dividends are dividends paid during the tax year by domestic corporations and qualified foreign corporations (a holding period applies to receive qualified dividend status). These dividends are subject to the same 0%, 15%, or 20% tax rate that applies to long-term capital gains. They will be shown in box 1b of the Form 1099-DIV you receive.
For capital gains (short and long-term) please see the following webpage for specific rates based on your earned income and filing status:
Highest QDI - Most Tax-Efficient
Below are the top funds sorted by one-year QDI down to 50%. In other words, these are the funds that paid at least 50% QDI in the last year. The last column shows the 3-year percentage when available.
Lowest Distribution % Income In The Last Year
This is the CEF universe sorted by the lowest percentage of the distribution that is classified as 'income' and possibly subject to ordinary rates. We included the yield and one-year z-score for comparison purposes.
Please note: when the '% QDI - 1yr' matched the 'Distribution % Income - 1yr', that indicates that all of the income paid that year qualified for the lower rate.
Highest RoC % of Distribution
These are the funds that had the largest percentage of the distribution in the last year that was comprised of return of capital or basis. We have also included the total distribution yield column. Remember, in most cases, RoC is not taxable. Many of these funds are in the natural resource sector, including Master Limited Partnerships.
How To Use These Sheets
These are funds that are choices to begin ADDITIONAL DUE DILIGENCE for inclusion into your non-qualified (taxable) accounts. They will complement your muni CEFs and can help produce better tax-equivalent returns if your marginal tax rates are very low (like those in retirement without RMDs or other incomes (SS, pensions, etc).
Most preferred equity funds pay qualified distributions, so they populate the list of highest QDI funds. Most of the preferred funds pay between 60% and 85% in QDI.
Only four funds have 100% return of capital in the last year:
- GAMCO Natural Resources Gold & Income (GNT), yield 10.2%
- D&P Select MLP & Midstream Nrg (DSE), yield 13.9%
- Nuveen All Cap Nrg MLP Opp (JMLP), yield 13.4%
- Tortoise Nrg Ind (NDP), yield 10.2%
Just one fund has 100% QDI (qualified distribution income) of their income distributions in the last year:
- Kayne Anderson MLP/Midstream Inv (KYN), yield 10.3%
Highest combinations of QDI and LTG (long-term capital gains):
- EV Tax-Advantage Global Dic Income (ETG), yield 7.6%, Equity tax advantage
- BlackRock Enhanced Global Div (BOE), yield 7.3%, covered called.
- C&S REIT & Pref Income (RNP), yield 6.1%, REIT and Preferreds
- BlackRock Utility and Infra Power Opp (NYSE:BUI), yield 6.2%, Utility
Highest Combinations of QDI, LTG, and ROC:
- Cohen and Steers MLP Income & Nrg Opop (MIE), yield 10.6%, MLP/Natural Resources
- Goldman MLP & Nrg Renaissance (GER), yield 13.4%, MLP/Natural Resources
- First Trust Intermediate Duration Pref & Inc. (FPF), yield 6.8%, Preferreds
- Nuveen Pref & Inc Term (JPI), yield 6.6%, Preferreds
- Aberdeen Total Dynamic Dividend (AOD), yield 8.4%, Global Equity
- JH Tax Advantaged Div Income (HTD), yield 5.9%, Equity tax adv
- First Trust Dynamic Euro Equity Income (FDEU), yield 11%, Euro equity
- JH Hedged Equity & Inc (HEQ), yield 11%, covered calls
- Voya Global Adv Prem (IGA), yield 7.8%, covered calls
This is not blanket buy recommendation. But if you own any of these funds, they should be in your non-qualified account paired with your tax-free muni funds. For those looking for good tax-efficient funds for your non-qualified (taxable) accounts, these are decent starting places to begin your research.
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Disclosure: I am/we are long FPF, FDEU, JPI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.