Using Seasonal and Cyclical Stock Market Patterns

Posted on August 5, 2013 | AAII Journal

Presidential terms, the calendar month and a basket of January indicators give insight into market direction.

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Should You Maintain an Allocation to Bonds When Current Rates Are Low?

Posted on August 4, 2013 | AAII Journal

Historical data shows an advantage to keeping bonds in a diversified portfolio even when interest rates rise sharply.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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