The Top Mutual Funds Over Five Years: The Bear’s Claw Marks Remain
Posted on August 2, 2013 | AAII Journal
The losses of the last bear market were so severe, they continue to impact the five-year annualized rates of returns for stock funds.
Dividend Safety Signs and Warning Flags
Posted on July 18, 2013 | AAII Journal
Many investors have sought shelter from the stock market storm in more mature dividend-paying companies, since the income from these firms provides at least some positive return in an otherwise bleak environment.
But the economic downturn has tested even the most mature and stable firms, with some forced to cut dividend payments. Others have managed to maintain current levels for the time being, but could be forced to make cuts in the future.
What signs can you look for that indicate the safety of a company’s dividend payment stream?
Investors in dividend-paying stocks typically seek stocks that are paying steadily increasing levels of dividend income, and have the cash flow and financial resources to continue to pay the dividends. There are a number of financial ratios and indicators you can use to evaluate this; the most common are listed below.
Chasing Dividend Yield for Income
Posted on June 25, 2013 | AAII Journal
Declines in overall yields may result in dividend strategies failing to provide adequate levels of income for retirees.
A Key to a Lasting Retirement Portfolio
Posted on June 10, 2013 | AAII Journal
Staying within or below a 4% to 5% withdrawal rate (adjusted annually for inflation) will decrease your risk of outliving your retirement savings.
Master Limited Partnerships: Income from a Unique Structure and Industry
Posted on May 22, 2013 | AAII Journal
MLPs are pass-through entities and have been able to pay consistent distributions due to steady demand and federally regulated prices.
Kenny Feng is president and CEO of Alerian. I spoke with him about master limited partnerships and the Alerian MLP exchange-traded fund (AMLP), which is held in our Model ETF Portfolio.
Charles Rotblut (CR): Could you explain what a master limited partnership (MLP) is and how it differs from a traditional corporation?
Kenny Feng (KF): Sure. Energy master limited partnerships are engaged in four primary businesses, which are the exploration and production, transportation, storage and processing of natural resources and minerals. By confining themselves to these specific activities, MLPs are not subject to entity-level taxation as a traditional C-corporation would be. They are, however, subject to the same reporting requirements (annual reports, filing 10-Ks, filing 10-Qs, filing notices of material changes and complying with the Sarbanes-Oxley act) as publicly traded corporations. It is also worth mentioning that they trade on the public exchanges; about two-thirds of the energy MLPs trade on the New York Stock Exchange and a vast majority of the remaining one-third trade on the NASDAQ.
CR: And with their structure, the earnings flow through, correct?
KF: Exactly. They are pass-through entities.
CR: I know that creates different tax issues for investors than investing in a traditional corporation.
KF: Exactly. If you were to invest in IBM (IBM) or any other publicly traded corporation that pays a dividend, you would get a Form 1099, and you would report the payments as dividend income.
Master Limited Partnership Tax Rules
Posted on May 16, 2013 | AAII Journal
The unique structure of MLPs gives them tax advantages, but also makes them more complex. Find out how distributions and gains are taxed.
For those who are new to them, the first thing to understand is that an MLP is simply a publicly traded partnership (PTP). (Not all PTPs are MLPs, however; a number of PTPs are simply commodity pools.) By buying shares, technically referred to as “units,” in an MLP, you become a partner (or a “unitholder”) in this very large partnership. As a partner rather than a corporate shareholder, you enter a whole new world of taxation. Partnership taxation is what makes MLPs a tax-advantaged investment, but it also makes them more complex than many other investments.
As a partnership, an MLP is not considered to be a separate entity for tax purposes the way a corporation is, but rather is a pass-through entity—sort of an agglomeration of all its partners. An MLP does not pay corporate tax; instead, all the things that go into calculating tax—income, deductions, gain, losses and credits—are divided up among the unitholders as if they had earned the income themselves. Part III of the K-1 tells you your total share of each of these items.
You pay tax on your share of the partnership’s taxable income, as determined by all the items on the K-1. It is important to remember that you will owe tax on this income whether or not you receive a cash distribution.
What about the distributions? Do you pay tax on them as well? You might think so, since the quarterly cash distributions look a lot like dividends; however, MLP distributions are not dividends, but quite a different creature. When you fill out your tax return, the only thing you have to worry about paying tax on is your share of net partnership income. The portion of the distribution that is equal to net income is covered by that tax payment.
An Income-Generating Options Strategy
Posted on May 10, 2013 | AAII Journal
Writing covered calls can add extra income to a buy-and-hold strategy, but it limits profits on the underlying stock.
Poor Advice About Social Security
Posted on January 8, 2013 | AAII Journal
A new working paper finds that individuals who turn to financial advisers for help on when to start taking Social Security benefits are often misguided.
Managing the Mental Aspect of Investing
Posted on December 10, 2012 | AAII Journal
Investors should consider whether they are being influenced by a good or bad herd behavior and who is on the other side of a trade.
How Investors Miss Big Profits
Posted on November 26, 2012 | AAII Journal
Back in 1993, a curious thought crossed my mind while analyzing the federal regulations that were new at the time.
Mutual funds were permitted to report investment returns for one, three, five and 10 years (“alpha”), but how many investors actually kept their investments unchanged for those specific periods? If all investors did not hold on to their investments for those precise periods, then they had to be doing better or worse than was being reported.
Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. Simply stated, alpha represents the value that a portfolio manager adds to or subtracts from a fund’s return. Investors’ alpha is the value a retail investor adds to or subtracts from the alpha delivered by the portfolio manager. The return of the respective index is considered to be zero alpha, so any excess over the index is considered positive investor alpha.
I developed a calculation that would measure whether mutual fund investors were actually earning more or less than the reported alpha. In 1994, DALBAR issued the first Quantitative Analysis of Investor Behavior (QAIB), showing that investors had severely underperformed the average mutual fund alpha! This underperformance continues to this day.
Investors were actually missing much of the alpha that mutual funds had earned. Using the S&P 500 index to approximate the returns that equity mutual funds produced, investors were leaving between 10.97% and 4.32% on the table, as Table 1 shows.
This shocking finding of underperformance led to research to understand how and why millions of investors were missing so much of the alpha and, ultimately, what they could do to capture more of the profits that funds were earning.