You can't ignore other tax issues either. Interest on home and student (depending on income) loans are deductable, most consumer loans are not, and I believe for student loans you don't even have to itemize. This reduces the effective rate of interest you pay on them--if you meet the income limitation of course. IMO however if you are paying 8% interest and it is not deductable I think you are better off paying the loan off early that most any other approach.
Trader Jorge, Could you give a little more background on the above referenced stocks', industry, etc. They seem somewhat comparable to REITs with high-yield and all. Are these companies essentially "forced" to pay out high dividends? Also, some people think money may move out of REIT's, other "non-traditional" high yielding stocks once the new tax plan kicks in. Will this be the case with this group of natural resource stocks as well? Thanks.
PVR and NRP are both coal royalty master limited partnerships (MLP's). They own land with coal reserves and lease them to 3rd party coal miners in exchange for royalty payments. The other stocks (FGP, SGU, APU) are propane MLP's which basically market and distribute gas. MLP's do not pay taxes at the corporate level since they are organized as partnerships. They also receive tax deferral status on the bulk of their dividend (which they call distributions) because of tax laws written to favor natural resource development. These companies pay out all of their available cash at the end of each quarter. They keep some cash on hand (not much) to provide for working capital and to meet debt covenants, etc, but typically have dividend yields in the ballpark of 8-12% (tax advantaged as well due to the deferral). REITs operate in a similar fashion, but I'm going to have to plead ignorance on how their depreciation tax shield differs from an MLP's depletion shield. That could be the difference between the two, other than the underlying businesses (real estate vs. natural resources). Both REITs and MLPs are typically valued based on a spread to the treasury. It can range anywhere from 200bps to 600bps over the 10-year, depending on the business characteristics. You typically want to hold these stocks when rates are going down (which would result in capital gain since the yield would go down -- yield and price are inversely coorelated), but if you are solely in it for the dividend, you won't care too much about stock price movement. In terms of how these stocks will react to the new tax plan -- I think the jury is still out on that question. The is still uncertainty whether the proposal will apply to cash distributions made by MLPs. If it does not apply, then the attractiveness of an MLP's dividend will be reduced versus a C-Corp's dividend (though C-Corp dividends rarely rise above 5% much less 10%). However, MLPs will providably still provide higher after-tax yields and better dividend growth (mainly through acquisitions) than C-Corps on average. You may have a small beneficial impact from investors beginning to focus more on dividend paying stocks as well. That should answer your question.
Thanks for explanation, the above phrase was the only part I'm unclear about. Are you saying that invdividual taxpayers(investors in PVR,etc.) pay a lower tax rate on distributions they receive due to natural resource develp. shelter? My point about REITs being less attractive with the new tax bill is more indirect. My thinking is that post-tax bill, if Phill Mor yields 8%(MO is extreme dividend example, i know) vs. MLPs or REITs(lets assume they do receive tax benefit) new yield of 10%-14%, MO becomes more attractive due to a proportionately higher yield vs. risk profile.
Yes, an investor in PVR would probably only pay tax on 30% of the $2.08/share that will be distributed because of the depletion allowance/shield. In terms of MO vs. MLPs and REITs, yes MO will be *hugely* advantaged by the new tax laws. You could argue that MO has a greater growth profile than a natural resource MLP since natural resources are depleting assets (although pipeline MLPs really aren't -- KMP, NBP, PAA, TPP, EPD). There is a sizable investor base out there that doesn't give any value to capital gains. All they care about is the dividend yield and regular income. It is this investor base that is attracted to REITs and MLPs. Risk could be another issue. A coal royalty company that leases coal which is sold for baseload power generation is not a very risky company at all. Those baseload plants run 24/7 365 days/year. They will always need coal -- gas doesn't work as well for baseload plants since it is too volatile (right now it's over $5.50mcf).
