Get Rich with Dividends: A Proven System for Earning Double-Digit Returns

Tax-Deferred Strategies

In Chapter 6, I mentioned Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), Business Development Corporations (BDCs), and closed-end funds, which often classify a significant portion or all of their distributions to shareholders as returns of capital.

As we discussed, a return of capital typically is not taxed in the year in which the distribution is received. Instead, it lowers the cost basis on the stock, and you will pay capital gains on the adjusted cost basis when you sell the stock.

How Return of Capital Works

Purchase stock: $10

Return of capital: $1

Adjusted cost basis: $9

Sell stock: $20

Capital gain: $11

In this example, an investor bought a stock for $10. She received a dividend of $1 per share that was all return of capital. She will most likely not pay taxes on the $1 in the year it was received. So her cost basis falls to $9 from $10. When she sells the stock, it’s trading at $20. Her capital gain is $11 instead of $10 because her cost basis was lowered by the $1 return of capital.

You can also defer your taxes based on which type of account your dividend stocks are in.

For regular dividend stocks, such as Perpetual Dividend Raisers, consider holding them in a tax-deferred account such as an IRA, 401k, or 529 plan. That way the dividends and reinvested dividends will grow tax free until you retire or tap the funds for college.

Look at the difference growing the money tax-deferred makes.

Let’s assume you have an ...