Benjamin Franklin’s famous quote about death and taxes rings true for many investors, especially as they approach retirement. The desire to avoid taxes while generating a steady income becomes a top priority. In this article, we will explore a simple portfolio strategy that aims to achieve a 7.8% dividend yield, solid dividend growth, and tax efficiency at both the individual and corporate levels.
The key to this tax-efficient portfolio lies in investing in three specific types of companies: business development companies (BDCs), midstream master limited partnerships (MLPs), and real estate investment trusts (REITs). These corporate structures are exempt from paying corporate income tax as pass-through entities, making them attractive options for tax-conscious investors.
By strategically placing REITs and BDCs in a Roth account and MLPs in a taxable account, investors can benefit from tax advantages. Holding these investments until death allows for the passing on of assets to heirs with a step-up in cost basis, effectively rendering distributions received tax-free. Reinvesting distributions to increase cost basis further defers taxes indefinitely, making this strategy a powerful tool for tax-efficient income generation.
Let’s delve into the nine stocks that make up this tax-efficient retirement income portfolio:
### BDCs
The BDCs in this portfolio include Morgan Stanley Direct Lending Fund (MSDL), Blue Owl Corporation III (OBDE), and Blackstone Secured Lending Fund (BXSL). MSDL offers a compelling 10.5% dividend yield, strong underwriting performance, and a conservative portfolio. OBDE boasts a 9.3% dividend yield and attractive risk-adjusted returns. BXSL, backed by Blackstone, offers a 9.9% dividend yield with a conservative portfolio composition.
### MLPs
The midstream MLPs selected for this portfolio are Enterprise Products Partners (EPD), Energy Transfer (ET), and MPLX (MPLX). EPD stands out for its strong balance sheet, attractive distribution yield, and growth prospects. ET offers a 7.9% distribution yield, investment-grade credit rating, and growth potential. MPLX has a track record of distribution growth and a solid balance sheet, making it a reliable income generator.
### REITs
The REITs included in this portfolio are W.P. Carey (WPC), Realty Income (O), and Mid-America Apartment Communities (MAA). WPC, with its industrial and warehouse properties, offers a 6.3% dividend yield and CPI-linked leases for stability. O, known for its diversified real estate portfolio, provides a 6% dividend yield and strong track record. MAA, a high-quality multifamily REIT, offers a 4.3% dividend yield and growth potential.
### Investor Takeaway
While the selected stocks may not be optimized for maximizing total returns, the portfolio’s aggregate return potential is solid. With a projected 7.8% dividend yield and expected growth rates, this portfolio offers a balanced mix of income generation and growth. Diversification across defensive sectors and different economic environments adds to the portfolio’s resilience.
In conclusion, building a tax-efficient retirement income portfolio requires careful selection of investments that offer high yields, growth potential, and tax advantages. By strategically allocating assets in a mix of BDCs, MLPs, and REITs, investors can create a robust income stream while minimizing tax liabilities. This approach not only provides financial security in retirement but also ensures a legacy of tax-efficient wealth transfer to future generations.
