Quick Read
-
REITs like Realty Income (O) and Ares Capital (ARCC) pay dividends taxed as ordinary income, costing a 24% bracket investor $8,220 annually on a $500,000 portfolio.
-
Ares Capital's 10.2% yield makes it the biggest tax loser in a taxable account and the top priority for Roth placement.
-
Reinvesting that $8,220 annual tax savings at 4% compounds to $244,690 over 20 years, measuring only the tax drag cost.
-
Just released. Our analysts combed the entire stock market and named the ten best stocks to buy right now, and Realty Income made the cut. Enter your email to see the other nine names and why O earned its spot. The report is free. Enter your email and see the full list.
Most of what a REIT or business development company pays you is taxed as ordinary income. In the top 37% federal bracket, that means the IRS takes more than a third of each payout. The 37% rate only applies to income that falls inside the top bracket. Most readers are in lower brackets and pay less, but every bracket loses something. At 24%, a portfolio that throws off $50,000 in dividends sends $12,000 to the IRS every year.
Qualified dividends get capital gain rates of 0%, 15%, or 20%. REIT and BDC distributions generally don't qualify, so they're taxed at your marginal rate. Even REIT short-term capital gain distributions are reported as ordinary dividends on Form 1099-DIV. REIT dividends may be eligible for the 26 U.S.C. § 199A deduction, which reduces the tax. The figures below use the full marginal rate. On top of that, a 3.8% net investment income tax can apply above income thresholds that depend on filing status.
$500,000 Split Five Ways: Roth Versus Taxable
This example puts $100,000 into each of the five stocks below. Yields are based on each company's forward dividend and the latest share price.
Free Report, Just Released
Why O Made Our Top 10 List
24/7 Wall St has helped investors make money for over two decades, and our top analysts just finished ranking the definitive Top 10 Stocks To Buy Now . Not the ten biggest companies. Not the ten everyone is arguing about. The ten best stocks to buy right now.
And O made the cut. See who else did.
The report is free, and you can see why we think each stock is a top investment today.
Enter Your Email and See the Ten →
| Stock |
Yield |
Annual Income |
|---|---|---|
| Realty Income( NYSE:O ) |
5.7% |
$5,720 |
| Ares Capital( NASDAQ:ARCC ) |
10.2% |
$10,210 |
| Main Street Capital( NYSE:MAIN ) |
5.8% |
$5,780 |
| W. P. Carey( NYSE:WPC ) |
6.0% |
$6,020 |
| EPR Properties( NYSE:EPR ) |
6.5% |
$6,500 |
Together they pay $34,240 a year. In a taxable account at 24%, you pay $8,220 in tax and keep $26,020. In a Roth, you keep all $34,240. That's a gap of $8,220 a year, or $82,170 over 10 years before any growth.
Realty Income Pays Monthly, and So Does Your Tax Bill
Realty Income is a net lease REIT that owns over 15,500 properties. Its forward dividend of $3.258 per share is well covered by 2026 AFFO guidance of $4.44-$4.45. The main risk is concentration: retail makes up 78.3% of its rent.
Ares Capital Loses the Most to Tax
Ares Capital is the largest BDC and the only ultra-high-yield name in this group above 10%. That makes it the stock that benefits most from Roth placement. Its core earnings of $0.46 per share fell short of the $0.48 dividend last quarter. The company has $1.37 per share of undistributed taxable income from prior years to cover the gap. The risk: most of its loans are floating-rate, so earnings drop when base rates fall.
Main Street Capital Adds Bonus Payouts on Top
Main Street Capital yields 5.8% on its regular dividend alone. It also pays a quarterly supplemental of $0.30, and all of it is taxed as ordinary income in a taxable account. Q2 distributable net investment income before taxes was $1.08 per share, and management expects at least $0.97 for Q3. The risk: the supplementals depend partly on realized gains, which vary.
W. P. Carey Covers Its Dividend With Room to Spare
W. P. Carey pays $3.80 a year, covered by AFFO guidance of $5.23-$5.29. The risk: Europe makes up 33% of its rent, so currency moves affect results.
EPR Properties Has the Widest Coverage Cushion
EPR Properties is a REIT that owns entertainment and leisure properties. It paid out 65% of AFFO in Q2, and its tenants' coverage stands at 2.1x. The risk: theaters still make up 34% of its rent.
Your Bracket Sets the Cost of Holding These in a Taxable Account
| Bracket |
Taxable Net |
Annual Roth Advantage |
|---|---|---|
| 22% |
$26,710 |
$7,530 |
| 24% |
$26,020 |
$8,220 |
| 32% |
$23,280 |
$10,960 |
| 37% |
$21,570 |
$12,670 |
Compounding Turns $8,220 a Year Into $244,690
Suppose the $8,220 you'd otherwise pay in tax each year is reinvested at a conservative 4%. After 10 years it reaches $98,660. After 20 years it reaches $244,690. At 37%, the 20-year figure is $377,230. This measures the tax cost only.
A Roth changes when and how you're taxed. Withdrawals are tax-free only if they're qualified distributions. That means they come after the 5-year period and meet one of these conditions: you're 59½ or older, you're disabled, the money goes to a beneficiary, or it's a first-home purchase capped at $10,000 over your lifetime. Any amount you convert is added to your taxable income for that year, which is why the quiet years between your last paycheck and your first RMD matter so much (we sized up that low-bracket conversion window in a free guide).
What to Do Before Your Next Filing
-
On your 1099-DIV, compare box 1a (total ordinary dividends) with box 1b (qualified dividends). The difference is income taxed at your full marginal rate.
-
Run the conversion math on Ares Capital first. Its yield is the highest of the five, so it loses the most to tax each year.
-
A phased Roth conversion can be modeled that moves the ordinary-income assets first and compares the result with keeping the qualified-dividend stocks in a taxable account.
The tax on these payouts comes due every year they sit in a taxable account. Work out the cost at your own bracket now and decide what you're willing to pay for convenience.
Got $1,000? O Made Our Top 10 List. Here's Who Else Did
If you have cash sitting in your account right now, give this two minutes. After more than two decades of helping investors beat the market, our top analysts at 24/7 Wall St. put together a definitive report on the Top 10 Stocks To Buy Today. And O was one of them.
They combed the entire market. It's not 10 ideas, not 10 stocks everyone is talking about, it's what their research points to as the 10 best stocks to buy right now, and it's free. Read more here and see which stocks made the list -->>
Contact editorial@247wallst.com for any questions or corrections.
