Ihave a fairly large collection of dividend-paying stocks in my portfolio, including seven real estate investment trusts (REITs). That means I collect both qualified and nonqualified dividends, with REIT income (of the nonqualified variety) largely treated as regular income.
But there’s a nuance here based on where I own the REITs that makes a huge difference when I pay my taxes and when I’m planning for the future. Here’s a closer look.
The list
My list of REIT holdings includes Realty Income (NYSE: O), W.P. Carey (NYSE: WPC), Federal Realty (NYSE: FRT), Ventas (NYSE: VTR), Simon Property Group (NYSE: SPG), Alpine Income Property Trust (NYSE: PINE), and, thanks to a Realty Income spinoff, Orion Office REIT (NYSE: ONL). There’s a lot going on here, which is increasingly obvious as I get ready to file my 2021 taxes.
For example, Orion Office, a recent spinoff from Realty Income, hasn’t paid a dividend yet, and Alpine, a small net lease REIT that I bought because of its fast-growing portfolio, I acquired in the middle of 2021. I also dividend-reinvest with all of my REITs, so the actual shares I own, and thus the income I receive, increases as time goes on. And, as if that weren’t complicated enough, five of the seven increased their dividends in 2021.
On top of all of that (and this is where things start to get more interesting), I own Federal Realty and Alpine in a tax-advantaged Roth account. So, for tax purposes, the income from these two REITs isn’t something that the government will ever touch.
Instead of trying to fully parse out the actual dollar figure from 2021, I’m going to give a rough run rate based on my current dividends here, rounding my share counts to make things easier on myself.
| REIT | Latest Quarterly Dividend | Approx. Shares Owned | Full-Year Run Rate Dividend | Account Type |
|---|---|---|---|---|
| Realty Income | $0.7395 | 580 | $1,715 | Taxable |
| W.P. Carey | $1.055 | 525 | $2,215 | Taxable |
| Ventas | $0.45 | 575 | $1,035 | Taxable |
| Simon Property Group | $1.65 | 315 | $2,079 | Taxable |
| Orion Office REIT | N/A | 55 | $0 | Taxable |
| Federal Realty | $1.07 | 365 | $1,562 | Roth |
| Alpine Income Property Trust | $0.27 | 1,390 | $1,501 | Roth |
| Total: | $10,107 |
Data source: Company financials and author calculations.
That’s an exact number, but it’s not exactly what I collected in 2021 or will collect in 2022, for the reasons noted above. It’s a rough estimate but one that gives me a solid financial backstop in case adversity strikes. Note that in addition to these REIT holdings, I also own a fair number of high-yield stocks that add to the total dividends I receive.
Moving things around
What I find most interesting about all of this is that for many years, I wanted to own my big dividend payers in a taxable account. That’s the opposite of the advice you might receive from a financial advisor, but I wanted to ensure I could access the cash flows I was generating if I needed to. In a tax-advantaged account, that wouldn’t be possible without penalties and other complications. Yes, I had to pay taxes on the REIT income as if it were earned income, but I was willing to pay that price for the liquidity.
But, as I get closer to retirement and my daughter gets closer to being out of my house, the need for that security is waning. Thus, I own Federal Realty and Alpine Income Property Trust in a Roth account, for which I paid taxes on the contribution so that I wouldn’t have to pay taxes on any cash taken out of the account or on income generated within the account. So roughly 30% of the REIT income I generate is tax advantaged.
I’m planning to take that even higher over the next couple of years by selling assets in my taxable account and then buying them in my Roth account. I’ll likely end up paying capital gains taxes on the move, but, again, I’m shifting from building a nest egg while ensuring a day-to-day safety net to preparing to live off my dividend income. And in the event of a bear market, I’ll definitely use the opportunity to capture any losses that pop up.
In the decade or so I have before retirement, my goal is to get all of these REITs over to a Roth. If I can do that, I’ll be generating a healthy slug of tax-free income on top of the dividends I get from my stocks, which currently get more favorable tax treatment.
A final thought
Investing is a very personal affair, as we all have different goals and approaches that change over time. I’m in the middle of a transition as my working years dwindle and I look forward to retirement. In four years or so, after my daughter has graduated from college, my need to protect against adversity will be materially reduced. (I don’t have a mortgage, so her college is the only major expense I’m facing today.)
Looking at all of the dividend income I get from REITs and where it lives will become increasingly important in my future planning. Maybe I’ve done things backwards, but I’ve done them in a way that makes financial sense for me. Perhaps my thoughts here will help you decide how you want to treat your dividends as you travel through life.
