Companies that give their investors a raise each year have consistently outperformed the broader stock market. Using data dating back to 1972, companies that initiated or grew their dividends generated an average total annual return of 10.1% versus 7.7% for the S&P 500, according to a study by Ned Davis Research. Given that history, investors should zero in on dividend growth stocks since they have a higher probability of outperforming both non-payers and non-growers.
If you want to take the pulse of the North American oil and gas market, one of the best places to start is Halliburton‘s (NYSE:HAL) quarterly conference call. As the largest oil services company in North America and with clients of all sizes across every shale basin, management has an intimate knowledge of what is going on in the oil patch at any given moment. Listening to, or reading a transcript of, Halliburton’s quarterly conference calls can give investors insights into the market that can help steer investment decisions.
Stocks that have doubled in a short span are often considered frothy, but that only holds true if they’ve run up too much too fast, riding the market’s short-term sentiments and biases. If the rally is backed by a company’s strong fundamentals and growth prospects, there’s little reason to believe a stock that has doubled won’t triple (or more).
Investors who follow the technology industry closely have likely heard a lot about the graphics processor maker NVIDIA Corporation (NASDAQ:NVDA) over the past few years. That may be because the company’s shares are up more than 950% over the past three years, and because it’s benefiting from the growth of emerging technologies including artificial intelligence (AI) and autonomous vehicles.
Need an extra incentive to ease into retirement with a part-time gig? Or to earn some extra cash to supplement your Social Security and IRA payouts? Would the chance to treat 20% of your freshly found income as tax-free do the trick?
If so, say thank you to the U.S. Congress.
The new tax law creates a special 20% deduction for “pass-through entities,” a category that includes most businesses in the U.S., whether they are organized as a Subchapter S corporation, a limited liability company or a sole proprietorship—that is, simply working for yourself. Basically, you’re a pass-through if you’re not a regular corporation.
That, in fact, was the driving force behind this deduction. The new law slashes the corporate tax rate from 35% to 21%, but it only slices the top personal rate from 39.6% to 37%. Because pass-through income is hit by personal rates, the 20% deduction is an attempt to share the wealth by cutting small-business taxes, too. Shielding 20% of qualifying income from tax effectively cuts the top rate from 37% to 29.6%, which is 10 full percentage points below the old top rate.
So, how big a deal is this? It could be huge.
Cotty Lowry, a highly successful real estate agent in Minneapolis, reports that his accountant thinks he’ll be a “big winner” under the new tax bill. The 20% write-off can apply both to Lowry’s net income from his real estate business and to the rental income thrown off by several buildings he owns. At 71, Lowry, who operates as a Subchapter S corporation, has been thinking of slowing down. But he says the new tax break that lets him keep more of what he earns in commissions, plus the “pure joy of helping my clients,” may encourage him to maintain his current pace a while longer.
How the Pass-Through Deduction Works
The 199A deduction, named after the section of the tax code that authorizes it, applies to “qualified business income.” It’s probably easiest to cite what does not qualify: earnings by an employee, earnings by a regular corporation and earnings from “specified service” businesses that provide service in fields such as health, law, accounting, performing arts and athletics.
You might wonder what’s left, but don’t worry. There’s a gigantic exception. The specified-services poison pill only applies to high-income individuals. If your income is less than $157,500 on an individual return or under $315,000 on a joint return, you can deduct 20% of your qualified business income even if it comes from a specified-service business. The write-off is gradually phased out as income rises above those levels. Because this article addresses side gigs in retirement, we’ll assume you qualify.
The IRS is still figuring this all out, but it’s likely the new deduction will be figured on a special form and then entered on the Form 1040 as a subtraction from adjusted gross income.
What kind of pass-through-income work might make sense for you? Consider phasing into retirement by becoming a consultant for your former employer. Janet Bodnar retired last year from her position as editor of Kiplinger’s Personal Finance magazine. But she didn’t hang up her typewriter. She occasionally writes for the magazine, and as an independent contractor, her earnings qualify for the pass-through tax break.
You don’t have to be a major league landlord like Lowry to get a 20% break on rental income. The IRS hasn’t written regulations yet, but Steve Fishman, author of Every Landlord’s Tax Deduction Guide (Nolo, $40), says he believes that owning a single rental property will rise to the level of a business, opening the door to the new deduction. Get creative. Do you make and sell crafts at local fairs or online websites such as Etsy? Drive for Uber or Lyft? Babysit, run a dog-walking service, tutor children or give music lessons? The new tax law gives you more incentive than ever to develop a new retirement income stream. And if you already have one, you’ll get to keep more of what you earn.
Most investors worry about losing their money to the market — not to their financial professional.
Choosing your investments with taxes in mind is a smart strategy as you approach retirement. Here are four income-generating possibilities that won’t trigger big tax bills.