Well what do you expect from The Oxford Club. Here's your prize, a way to play the Canadian royalty gas trusts for big bucks. You long term buyer and holders might be interested in this. I didn't realize 60% of your divdends were tax free and the rest is now only taxed at 15%. Very interesting. Comments/suggestions/ideas on it? And the boys at Change Wave give AMAT and QCOM along with a few others a slam. Oh my.
We Interrupt Regular Programming to Talk Taxes
by Tobin Smith
Editor, ChangeWave Investing
October 27, 2003
As the captain of your own financial ship, it is up to YOU to take the necessary steps required to lower your investments' tax bite and improve your after-tax returns.
Repeat -- if you invest after-tax money without active tax management, you are throwing away thousands (if not tens of thousands) of dollars each year.
(Note: If all your money is in tax-deferred savings plans like 401(k)s or IRAs, then your only strategy here is to make sure that your plan does NOT hold tax-advantaged investments. Holding securities like annuities or gas royalty trusts or Master Limited Partnerships whose valuations reflect their tax-advantaged nature is waste in a tax-deferred plan. It's not illegal, immoral or fattening -- just a waste.)
But the big enchilada of tax management comes in your taxable investment accounts. Smart moves here can literally cut five years off your "have-to-work" life. Here are three examples:
Point One: Make New Tax Laws Work For You
Big news from the IRS. Under the new tax law, the IRS has now officially opined in a recent notice that ANY foreign security that is traded in the U.S. as an American Depositary Receipt (ADR) or listed on any national security exchange qualifies for the 15% maximum tax treatment on dividends RETROACTIVE to Jan 1.
For investors like our ChangeWave subscribers, this validates our high-income/huge after-tax income investments in Canadian-based natural gas income trusts.
Do the math for a second. Put a $100,000 in a taxable margin account. Buy a mix of the best of the best of these 13%-15%-16% annual dividend payors.
Add to your holdings on the day AFTER they go ex-dividend -- a day they usually drop 1%-2% from holders who regularly liquidate holdings after they qualify for dividend payments. Take your account up to 50% margin (now you own $200,000 of these funds). Now the fun begins.
How would you like to lock in a 24% after-tax return for the next few years and get monthly dividend checks to boot?
This is not too good to be true. On the contrary, it's what we call "unintended consequences" of hastily passed tax legislation. Here's the deal.
With the new tax law, 85% of your dividends are tax-free. (Very cool.) But in a royalty trust, up to 60% or more of your dividend is considered return on your original capital.
For every dollar you get in dividends, 60% is 100% tax-free. The other 40% is taxed at 15%, so you are getting 94 cents of every dollar earned in dividends TAX FREE.
So you put in $100,000 of your own money, and you borrowed $100,000 to buy our favorite Canadian gas royalty trusts. At 14% average annual yield, you get $28,000 of cash dividends (minus Canadian tax withholding you get back when you file your taxes) or 28% gross annual cash-on-cash yield.
Pay your 4% margin interest (deductible, of course), and you have 24% net after-tax income from these income monsters. That's $240,000 a year in the case of a $1,000,000 investment.
What's the catch? You have to buy the right Canadian royalty trusts, you have to patiently build your portfolio, and you have to be right on $4.50-$6 natural gas prices for the forecastable future.
Again -- for this exercise, take our forecast (and that of about 100 other natural gas analysts) to heart and understand until we have at least 10 liquefied natural gas plants bringing in 20 billion -30 billion cubic feet of gas A DAY, our natural gas resources will continue to be tight for the foreseeable future.
Next, only invest in trusts that are reinvesting 35%-50% of their income in new reservoirs of long-lived gas reserves-this adds to the years of the trust in a big way.
The point is, this strategy has a MUCH smaller downside risk than upside with such a lopsided after-tax return. I use this strategy as the foundation of my investment portfolio -- and reinvest the dividends to buy more and more of my favorite trusts on a monthly dollar-cost average.
The reinvested dividends also lower your margin percentage, which gives you some buying power to add if you get an unordinary dip.
Point Two: Some Stocks Are Worth More Dead Than Alive
The hardest thing to do in investing is to sell your big losers. Almost every investor who comes to ChangeWave holds at least one of the TechWreck 20 we have advised selling. (Stocks like Sun Microsystems, JDS Uniphase, EMC, Corning , Lucent, Nortel, Ariba, Commerce One, Siebel, Oracle, Applied Materials, Qualcomm and the former AOL Time Warner.)
This year, you just may have some taxable profits in your account. Now is the time to step up to the plate and get the most out of your dead stocks. Many of them were purchased at such outrageous prices you would need to live 100 years to revisit your cost basis.
The real trick here is to upgrade your stocks at the same time. Our strategy is to BUY emerging beneficiaries of long-term irreversible transformational change and SELL those stocks whose market growth has peaked or is contracting.
What we like to see our subscribers do is to match up their hopeless losers against taxable profits for this year (you can match all your short- and long-term gains against losses) and then rollover excess losses to next year. Harvesting the tax savings now allows you to build cash to buy the RIGHT stocks that have long, escalating growth curves ahead of them rather than behind.
This frees up cash to get your portfolio growing again at a very fast rate without the drag of less well-positioned stocks.
Point Three: Self-Employed? Make Sure You Have a Defined Benefit Plan
This one is a no-brainer that I see lots of friends and subscribers screw up. Go to your CPA and ask him/her who they use to set up defined benefit plans for closely held companies, and get it done BEFORE you file your taxes. Guys like me at age 45 can avoid hundreds of thousands in taxes each year and add hundreds of thousands in new net worth stuffing these plans (based on actuarial assumptions) with every dime we can.
It costs about $1,500 in actuarial fees to set these plans up, making this the no-brainer of all time. If you are over 50, you can stuff in $200,000 or more PER YEAR (depending on what you pay yourself) in these plans. It's criminal not to have one in place.
Do your tax planning now with your tax pro before the holidays start and you get too busy -- if you wait till then, it's too late.
Saving the maximum amount of taxes is the American way. Paying taxes you can legally avoid is just plain dumb.
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