水不恋云    复制

503-Unconventional Equities  
  Our discussion of the stock market would not be complete without an
  examination of what we might refer to as "unconventional equities." We lump
  three types of securities into this category: real estate investment trusts
  (REITs), master limited partnerships (MLPs), and royalty trusts. These
  securities trade like stocks but carry important differences, particularly
  with regard to tax treatment. Let's take a look at the benefits and drawbacks
  of each security type.
  
  
  Benefits of REITs
  
  
  A real estate investment trust (REIT) is a company that owns and manages
  income-producing real estate. REITs were created by an act of Congress in 1960
  to enable large and small investors alike to enjoy the rental income from
  commercial property. REITs are governed by many regulations, the most
  important being that they must distribute at least 90% of their taxable income
  to shareholders each year as dividends; the REIT is permitted to deduct
  dividends paid to shareholders from its taxable income. Other important
  regulations include:
  
    Asset requirements: at least 75% of assets must be real estate, cash, and
    government securities.
    Income requirements: at least 75% of gross income must come from rents,
    interest from mortgages, or other real estate investments.
    Stock ownership requirements: shares in the REIT must be held by a minimum
    of 100 shareholders.
  
  REITs specialize by property type. They invest in most major property types
  with nearly two thirds of investment being in offices, apartments, shopping
  centers, regional malls, and industrial facilities. The rest is divided among
  hotels, self-storage facilities, health-care properties, and some specialty
  REITs that own anything from prisons, theatres, and golf courses to
  timberlands.
  
  Some benefits of REITs include:
  
  High Yields. For many investors, the main attraction of REITs is their
  dividend yield. The average long-term (15-year) dividend yield for REITs is
  about 8%, well more than the yield of the S&P 500 Index. Also, REIT dividends
  are secured by stable rents from long-term leases, and many REIT managers
  employ conservative leverage on the balance sheet.
  
  Capital Gains. In addition to the growing, secure dividend yield, REITs have
  historically appreciated in value, providing decent capital gains. This has
  led to respectable annual total returns of about 12% historically. The last
  five years before mid-2005 have been exceptional for REITs, which produced
  total returns of 23% while other major stock indexes produced negative
returns.
  
  Simple Tax Treatment. Unlike most partnerships, tax issues for REIT investors
  are fairly straightforward. Each year, REITs send Form 1099-DIV to their
  shareholders, containing a breakdown of the dividend distributions. For tax
  purposes, dividends are allocated to ordinary income, capital gains, and
  return of capital. As REITs do not pay taxes at the corporate level, investors
  are taxed at their individual tax rate for the ordinary income portion of the
  dividend. The portion of the dividend taxed as capital gains arises if the
  REIT sells assets. Return of capital, or net distributions in excess of the
  REIT's earnings and profits, are not taxed as ordinary income, but instead
  applied to reduce the shareholder's cost basis in the stock. When the shares
  are eventually sold, the difference between the share price and reduced tax
  basis is taxed as a capital gain.   
  
  Liquidity of REIT Shares. REIT shares are bought and sold on a stock exchange.
  By contrast, buying and selling property directly involves higher expenses and
  requires a great deal of effort.
  
  Diversification. Studies have shown that adding REITs to a diversified
  investment portfolio increases returns and reduces risk since REITs have
  little correlation with the S&P 500.
  
  
  Drawbacks of REITs
  
  
  REITs also have some drawbacks, including:
  
  Sensitive to Demand for Other High-Yield Assets. Generally, rising interest
  rates could make Treasury securities more attractive, drawing funds away from
  REITs and lowering their share prices.
  
  Property Taxes. REITs must pay property taxes, which can make up as much as
  25% of total operating expenses. State and municipal authorities could
  increase property taxes to make up for budget shortfalls, reducing cash flows
  to shareholders.
  
  Tax Rates. One of the downsides to the high yield of REITs is that taxes are
  due on dividends, and the tax rates are typically higher than the 15% most
  dividends are currently taxed at. This is because a large chunk of a REIT's
  dividends (typically about three quarters, though it varies widely by REIT) is
  considered ordinary income, which is usually taxed at a higher rate.
  
  
  Benefits of MLPs
  
  
  In recent years, many U.S. energy firms have reorganized their slow-growing,
  yet stable businesses, such as pipelines and storage terminals, into master
  limited partnerships, or MLPs. There are some important differences between
  buying shares of a corporation and buying a stake in an MLP. With MLPs,
  investors buy units of the partnership, rather than shares of stock, and are
  referred to as "unitholders."
  
  There are two classes of MLP owner: general partners and limited partners.
  General partners manage the day-to-day operations of the partnership. An MLP
  technically has no employees, so all services, from management to bookkeeping,
  are provided by the general partner. All other investors are limited partners
  and have no involvement in the partnership's operations. Limited-partner units
  are publicly traded, while general-partner units usually are not. The general
  partner stake is often 2% of the partnership, though the general partner can
  also own limited-partner units to increase its percentage of ownership.
  
  Companies that use the MLP format tend to operate in very stable, slow-growing
  industries, such as pipelines. These types of firms usually offer dim
  prospects for unit price appreciation, but the stability of the industries
  that use the MLP format means below-average risk for investors. Cash
  distributions usually stay relatively steady over time (growing at little more
  than overall inflation), causing MLP units to trade somewhat like bonds,
  rising when interest rates fall and vice versa.
  
  Some benefits of MLPs include:
  
  High Yield. Most MLPs offer very attractive yields, generally falling in the
  6%-7% range.
  
  Consistent Distributions Over Time. The businesses operated as MLPs tend to be
  very stable and produce consistent cash flows year after year, making the cash
  distributions on MLP units very predictable.
  
  Favorable Tax Treatment. Firms primarily switch to the MLP structure to avoid
  taxes. While shareholders in a corporation face double taxation--paying taxes
  first at the corporate level, and then at the personal level when those
  earnings are received as dividends--owners of a partnership are taxed only
  once: when they receive distributions. There is no partnership equivalent of
  corporate income tax. Cash distributions to owners often exceed partnership
  income, and when they do, the difference is counted as a return of capital to
  the limited partner and taxed at the capital gains rate when the unitholder
  sells. Not only are capital gains deferred until an owner decides to sell, but
  capital gains tax rates are lower than income tax rates.
  
  Lower Cost of Capital. The absence of taxes at the company level gives MLPs a
  lower cost of capital than is typically available to corporations, allowing
  the MLPs to pursue projects that might not be feasible for a taxable entity.
  
  General Partner Compensation Aligned with Limited Partners' Interest. Most
  general partners are paid on a sliding scale, receiving a greater share of
  each dollar of cash flow as the limited partners' cash distributions rise,
  giving the general partner an incentive to increase limited-partner
  distributions.
  
  
  Drawbacks of MLPs
  
  
  Investors should also consider the downsides to MLPs, which include:
  
  Personal Tax Liability. Each unitholder is responsible for paying his or her
  share of the partnership's income taxes, which can make filing taxes more
  complicated. This is particularly true for larger unitholders, who may have to
  pay taxes in the various states in which the partnership operates. Moreover,
  limited partners might owe taxes on partnership income even if the units are
  held in a retirement account.
  
  Limited Pool of Investors. MLPs face a smaller pool of potential investors
  than traditional equities because institutional investors, such as pension
  funds, are not allowed to hold MLP units without incurring tax liability.
  These large investors do not ordinarily pay taxes, so they tend to shy away
  from MLPs.
  
  Institutional investors represent the majority of investor dollars in the
  market, so eliminating them reduces the potential demand for MLP units.
  Congress recently approved a provision allowing mutual funds to buy MLPs,
  which should dramatically increase the number of potential investors.
  
  
  Benefits of Royalty Trusts
  
  
  Royalty trusts, like MLPs, generally invest in energy sector assets. Unlike
  the steady cash flows at MLPs, royalty trusts generate income from the
  production of natural resources such as coal, oil, and natural gas. These cash
  flows are subject to swings in commodity prices and production levels, which
  can cause them to be very inconsistent from year to year. The trusts have no
  physical operations of their own and have no management or employees. Rather,
  they are merely financing vehicles that are run by banks, and they trade like
  stocks. Other companies mine the resources and pay royalties on those
  resources to the trust. For example, Burlington Resources, an oil exploration
  and production company, is the operator for the assets that the largest U.S.
  royalty trust, San Juan Basin Royalty Trust SJT, owns the royalties on.
  
  Royalty trusts end up on most investors' radar screens because of the
  incredibly high yields some of them offer, many in excess of 10%. In a
  low-interest-rate environment, it's easy to understand why such an
  income-producing investment might be garnering more attention.
  
  Many of the positive and negative attributes of owning a royalty trust are
  similar to those faced by MLP unitholders. The benefits are:
  
  High Yield. Trusts are required to pay out essentially all of their cash flow
  as distributions. Because of this, nearly all royalty trusts have
  above-average yields, many wildly above average.
  
  Tax-Advantaged Yield. Due to depreciation and depletion, distributions from
  most trusts are not considered income in the eyes of the IRS. Rather, these
  nonincome distributions are used to reduce an owner's cost basis in the stock,
  which is then taxed at the lower capital gains rate and is deferred until an
  owner sells.
  
  No Corporate Income Tax. Trusts are merely "pass-through" investment vehicles.
  The issues surrounding double taxation of dividends do not apply.
  
  Peculiar Tax Credits. Have you ever received a tax credit for producing fuels
  from nonconventional sources? If you own a royalty trust, you might qualify
  for such credits. The laws on this issue are in flux, and the credits are
  generally small, but it's still a nice potential perk.
  
  "Pure" Bets on Commodities. Want to bet on the future price appreciation of
  natural gas but don't want to get involved with the futures market? An
  excellent way to do that would be to buy a royalty trust that owns gas. The
  value of any given trust and the distributions it pays are directly tied to
  the prices of the underlying commodity. Just remember the sword cuts both ways
  here. The trust's income (and therefore probably the trust's stock price)
  could end up falling if commodity prices go down instead of up.
  
  
  Drawbacks of Royalty Trusts
  
  
  The downsides to royalty trusts include the following:
  
  Depletion, Depletion, Depletion. Royalty trusts own royalties on a finite
  amount of resources. Once those resources are gone, they're gone. As the
  resources deplete, royalties and distributions will fall and will, eventually,
  go to zero. In financial terms, there is no terminal value. Granted, most
  trusts won't hit this point for two or three decades (or more), but it's still
  incredibly important to consider that distributions will eventually contract
  and disappear.
  
  Volatile Distributions. Trusts typically pay out their distributions on a
  quarterly or monthly basis. If royalties fall in that period due to the
  underlying commodity price tanking, distributions will also fall. It's
  entirely conceivable that a trust that yielded 15% in the last 12 months could
  yield 3% in the next 12.
  
  Tax-Filing Complexity. Owners of royalty trusts are required to report the pro
  rata portion of a trust's total income and expenses on their tax returns. This
  typically means filing Schedules E and B as well as having additional work
  with Form 1040.
  
  State Income Taxes. Owners of trusts are liable for paying income taxes in the
  states in which the trust generates its royalties. Different states have
  different thresholds for when taxes have to actually be filed and paid, and
  the likelihood of owing income tax in multiple states increases with the size
  of a given ownership position.
  
  
  The Bottom Line
  
  
  Though they require a bit of work to understand and may increase tax
  complexity, investing in REITs, MLPs, and royalty trusts can boost the
  income-producing power of most portfolios.