NeutralAVGOBroadcomBroadcomMSFTMicrosoftMicrosoft

2d ago

Income Machine Report #4: Accenture Graded

Hi everyone! The Fed raised rates on September 16, its first hike since 2023, and the 10-year Treasury ended the month above 5%. Dividend stocks did not enjoy that. Since our September Best Buys on the 3rd, Realty Income is down 10%, Brown & Brown 17%, and Casey’s 20%. The machine kept paying anyway. Zero cuts. Microsoft, McDonald’s, and VICI all rose, and McDonald’s made it 50 straight years, becoming a Dividend King. The Universe also grew. Carlisle, Lowe’s, Broadridge, WM and Main Street joined on September 26, and we are now 35 names. This week I re-ran the valuation on all 35, so every name has a fresh Buy Below. And on October 1, Accenture reported. We have been waiting on this one since July. In today’s issue, we will discuss: Accenture: grading the four tripwires What a rate hike does to the Universe The valuation reset: new Buy Below prices The raises: three more landed Report cards: Broadcom, Casey’s and Cintas The scorecard The Buy Below watch Okay, let’s dive in. Accenture: grading the four tripwires Some history for newer readers. Accenture has been one of our Best Buy Now names since July. In our July deep dive, I set four tripwires, the things that would make me change my mind: Two consecutive quarters of falling bookings Gross margin below 32% Payout ratio through 55% without earnings growth A dividend raise below 5% in September Tripwire #1: bookings. New bookings are the contracts Accenture signed during the quarter, the work it will bill for later. Falling bookings today mean falling revenue tomorrow, which is why we put them first on the list. Here is the run-up to October 1: Q4 FY25: $21.31 billion Q1 FY26: $20.94 billion Q2 FY26: $22.11 billion Q3 FY26: $19.32 billion Q3 was down, at $19.32 billion versus $19.7 billion a year earlier. The quarter before it was up. So that’s one, and the tripwire needs two in a row. So did Q4 make it two? No. Bookings came in at $22.17 billion, up 4% from $21.31 billion a year ago (5% in local currency). Accenture signed $1.20 of new work for every dollar it billed in the quarter. Back to growing, which is what we wanted. Tripwire #2: gross margin Gross margin is what’s left of each revenue dollar after paying the people who do the work (revenue minus cost of services, divided by revenue). Q4 FY25: 31.89% Q1 FY26: 33.07% (32.92% a year earlier) Q2 FY26: 30.26% (29.86% a year earlier) Q3 FY26: 32.77% (32.87% a year earlier) Q4 FY26 is the one we watch, because last year’s fourth quarter already slipped under 32%. The fourth quarter came in at 32.04% ($5,984.8 million of gross profit / $18,679.1 million of revenue), up from 31.89% a year earlier. That clears the reworded test, and it's back above 32% on the old one too. The full year landed at 32.05%, up from 31.91%. Tripwire #3: payout ratio Accenture pays $1.63 a quarter, $6.52 a year. Over the last twelve months through Q3 it earned $12.52 a share (GAAP). Payout ratio going in: 52.1% ($6.52 / $12.52) Free cash flow, first nine months of FY26: $8.78 billion Dividends paid over the same nine months: $3.01 billion, 34% of free cash flow ($3.01 / $8.78) Measured on free cash flow, we’re well covered. On earnings, 52% is a good number, and regardless of the dividend raise, I feel good about the coverage. The new dividend is $1.71 a quarter, $6.84 a year. FY26 earnings came in at $13.56 a share (GAAP), up 11.6% from $12.15. Payout ratio now: 50.4% ($6.84 / $13.56) Free cash flow, FY26: $11.62 billion, above the top of the $10.8 to $11.5 billion guide Dividends paid, FY26: $3.99 billion, 34% of free cash flow ($3.99 / $11.62) The payout ratio went down, not up. Clear. Tripwire #4: the raise The last two raises: September 2024: $1.29 to $1.48, up 14.7% September 2025: $1.48 to $1.63, up 10.1% Below 5% trips it. $1.63 to $1.71, up 4.9% ($1.71 / $1.63). Accenture’s release calls it 5%. The math says 4.9%. By the letter of the tripwire, it tripped. By a tenth of a point. The new dividend is payable November 13 to shareholders of record on October 13. The five questions How did the quarter hold up against the five questions we ask every company? Did free cash flow cover the dividend with room to spare? Yes. 2.9 times ($11.62 billion / $3.99 billion). What did guidance do? FY27 calls for 3% to 6% revenue growth in local currency, $14.39 to $14.81 of earnings per share (6% to 9% above FY26 GAAP), and $11.0 to $11.8 billion of free cash flow. Where is the payout ratio headed? Down. 52.1% going in, 50.4% now, and 46.8% on the middle of next year’s earnings guide ($6.84 / $14.60). Are margins holding? Yes. Operating margin was 15.4% for the year, up from 14.7% (15.8% adjusted, up from 15.6%), and FY27 guides to 15.9% to 16.1%. Is capex crowding the payment? No. $742.7 million in FY26, up from $600.0 million, which is 1% of revenue. FY27 guides to $900 million. Verdict for our process One tripwire out of four, and it tripped by a tenth of a point. Bookings grew, margins grew, the payout ratio fell, and free cash flow beat the top of the guide. I’m not going to pretend 4.9% is 5%, so the tripwire counts, and we’ll hold Accenture to a higher bar on next year’s raise. But a raise that misses by a tenth of a point, paid out of a falling payout ratio, isn’t a reason to sell. Accenture stays a Buy. At $214.50 as of Thursday, it sits 6+% below the $227.35 Buy Below. That’s Accenture, graded in full. The same treatment for the rest of the Universe is below. That’s Accenture, free. Below the line: the three raises since Issue #3, each measured against that company’s own record, and one of them came in at 2.2%, down from 4.0% last year. Report cards for Broadcom, Casey’s and Cintas. What the Fed’s hike did to our REITs, our utilities and the ratings agencies. A fresh Buy Below for all 35 names, including the five new ones, and two of those five go straight to Best Buy Now. Casey’s beat on earnings and fell 14% the next day. I would read that section first. Members, keep scrolling. Everyone else, seven days free. Unlock the full Universe report $369 a year or $35 a month. Thirty-day money-back guarantee either way. Read more

MSFTMicrosoftNeutralMicrosoft

6d ago

The 4-Layer Dividend Stock Screener (Free Template Inside)

A 6.2% yield from a household name sounds like a gift. So does a 51-year streak of raises. Only one of them passes all four layers of the screener or filter we’re building today, and surprise it isn’t the one with the biggest yield. In today’s article, we will cover: Where the Four Layers Come From Layer #1: The Business Layer #2: Dividend Safety Layer #3: Management Layer #4: The Price How to Use the Filter in Your Process Common Mistakes to Avoid The template is free. 4 Layer Dividend Stock Filter 125KB ∙ PDF file Download Download If you already run every dividend stock you buy through a checklist, you don’t need this newsletter. If you’ve been meaning to build one and haven’t gotten around to it, that is what we do here. One company a week, filings open, math shown. Put me on the list Okay, let’s dive in and build a filter we can run on any dividend stock. Where the Four Layers Come From In his 1977 letter to shareholders, Warren Buffett laid out how Berkshire picks stocks: “We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.” Four filters, one sentence. In 2022, I built my own stock-buying checklist around those four filters and called them pillars: business, management, financials, and valuation. When I wrote that piece, Mohnish Pabrai’s checklist ran 95 to 100 questions and took him 20 minutes to work through. I love the idea. Most of us won’t do it every time. So what does a checklist look like when we’re buying for the dividend? Same four filters, adjusted for what a dividend investor needs to know: The business: is this a business worth owning? Dividend safety: does the cash cover the payment? Management: is management growing the dividend and treating shareholders right? The price: is it cheap enough today? We run them in that order, and we stop at the first fail. No point checking the price on a business we don’t want to own. Four guinea pigs today: Automatic Data Processing ($ADP) Carlisle Companies ($CSL) Microsoft ($MSFT) Pfizer ($PFE) One caveat up front. Every pass line below is a starting point, not gospel. A bank, a REIT, and a software company don’t look alike on paper, and the trick is knowing which metric fits which business. Layer #1: The Business Can we explain how the company makes money in two sentences? If not, we move on. That is Buffett’s first filter, and we don’t need a spreadsheet to figure it out. Then three numbers: ROIC above 15%. Return on invested capital tells us how much profit the company squeezes out of every dollar tied up in the business (after-tax operating income ÷ debt plus equity, minus cash). Operating margins steady or rising. Revenue growing. Big exception here: banks, insurers, and other financials. Debt is their raw material, so ROIC tells us very little. For financials, we swap in return on equity, and the pass line goes up to 15% . Now our guinea pigs. ADP runs payroll and HR for businesses of every size. Revenue grew from $15.0 billion in fiscal 2021 to $21.9 billion in fiscal 2026, 7.9% a year. Pre-tax margins were 26.1% ($5,730M pre-tax income ÷ $21,947M revenue). ROIC comes in at 65% ($4,414M of after-tax profit ÷ $6,765M of invested capital). That ROIC is a little inflated. ADP holds client payroll money before it goes out the door and earns interest on it, $1.35 billion in fiscal 2026. Remove the interest-income boost, and it equals 41.3%. Either way, it clears 10% with plenty of room to spare. Microsoft sells software and cloud computing to just about everyone. Revenue went from $168.1 billion to $331.8 billion over the same five years, 14.6% a year. Operating margin of 46.8% ($155.2B ÷ $331.8B), and it has risen three years running. ROIC of 30.8% ($125.1B after-tax operating income ÷ $405.8B invested capital). Easy pass. Carlisle makes commercial roofing and building envelope products. ROIC of 22.0% ($784.5M after-tax operating income ÷ $3,564.9M invested capital). Operating margin of 20.0% ($1,002.5M ÷ $5,019.9M). Carlisle passes, with a caveat. Organic revenue fell 2.9% in 2025 and another 5.0% in the first quarter of 2026, and the operating margin slipped from 22.8% the year before. Management blames “continued softness in residential and non-residential new construction markets.” Construction runs in cycles, so I’m giving it a pass, but it’s a pass we will keep an eye on. Pfizer is the judgment call. Revenue went from $100.3 billion in 2022 to $62.6 billion in 2025 as COVID vaccine and treatment sales rolled off. Pre-tax income fell from $34.7 billion to $7.5 billion. Does that make it a bad business? Not necessarily. A lot of that 2022 revenue was never coming back, and everyone knew it. So let’s give Pfizer the benefit of the doubt and move it to layer two. Layer #2: Dividend Safety Does the cash cover the payment? If you read “Don’t Chase High Yields” on September 22, this is step one of that test. We use the coverage ratio: Coverage = free cash flow ÷ dividends paid Above 1.5x: comfortable 1.2x to 1.5x: fine, watch it Below 1.2x: the dividend now depends on things going right Free cash flow is cash from operations minus capital expenditures. For REITs, swap in AFFO (the REIT version of free cash flow), for MLPs, distributable cash flow, and for BDCs, net investment income. ADP: 1.82x ($4,776M of free cash flow ÷ $2,626M of dividends). One adjustment worth knowing: ADP reports a second spending line beside capex, “additions to intangibles,” so we subtract both. Comfortable. Microsoft: 2.53x ($66,987M ÷ $26,445M). Comfortable, but look at the trend: Fiscal 2024: 3.4x Fiscal 2025: 3.0x Fiscal 2026: 2.5x What happened? The AI build-out. Capital expenditures went from $44.5 billion in fiscal 2024 to $115.9 billion in fiscal 2026. Cash from operations rose 54% over those two years, and free cash flow still fell 9.6%. Management says capex grows again in fiscal 2027. Microsoft passes easily, but coverage is a trend, not a snapshot, and this one is heading the wrong way. The big payout needs to come in the next few years or the Capex hit was a waste. Carlisle: 5.36x ($970.6M ÷ $181.1M). The dividend is the safest of the four by a mile. Where the rest of the cash goes is another matter. Carlisle spent $1.3 billion buying back its own stock in 2025, plus $181 million on dividends, against $971 million of free cash flow. The difference came from borrowing; long-term debt went from $1.9 billion to $2.9 billion during 2025. The dividend is safe. The buyback is funded by debt, and that works for a while, but not forever. So this layer includes one more question: what else is the cash paying for? Pfizer stops here. 2025: 0.93x ($9,075M ÷ $9,771M) Trailing twelve months through June: 1.12x ($10,985M ÷ $9,785M) Under 1.2x both ways. On top of that, Pfizer carries $63.2 billion of debt, much of it from the $31 billion it borrowed in 2023 to help pay for Seagen, and management says buybacks wait until the balance sheet comes down. To be clear, Pfizer hasn’t cut. The third-quarter payment was its 351st consecutive quarterly dividend. But a 6.2% yield on 1.12x coverage is a dividend that needs things to go right. And if it had made it to layer three, it would’ve failed there too. In December 2023, Pfizer called its raise “the fifteenth year of consecutive dividend increases.” It raised again in December 2024, to $0.43 a quarter. In December 2025 the board declared $0.43 again. The word “increase” is nowhere in the release. A streak of more than 15 years ended, and it happened quietly. You just watched a raise streak of more than 15 years end with no announcement at all. The only way to catch that is to line up the December releases side by side. We do that every week on a different company. Free, same as this. Send me next week's Layer #3: Management Buffett wanted “honest and competent people.” We can’t interview the CEO, but we can check how management uses our money. Two questions: Is the dividend growing every year? Raises tell us management believes the cash will keep coming. Is the share count flat or falling? A company that issues more shares every year is diluting our ownership, and the dividend bill grows right along with it. ADP: 51 straight years of raises. The latest came in November 2025, from $1.54 a quarter to $1.70 (+10%). Dividends per share grew from $3.70 in fiscal 2021 to $6.64 in fiscal 2026, 12.4% per year. Diluted shares fell 5.8% (428.1 million to 403.3 million). Love the consistency. Microsoft: raised the dividend 8% on September 15, from $0.91 a quarter to $0.98. Dividends per share grew from $2.24 to $3.64 over five years, 10.2% a year. Diluted shares fell 2.0%, which isn’t much for a company that spent $22.3 billion on buybacks in fiscal 2026. Carlisle: raised 14% in August, from $1.10 a quarter to $1.25, its 50th consecutive year. Dividends per share grew from $2.13 in 2021 to $4.20 in 2025, 18.5% a year. And the share count fell 23.9%, from 53.2 million to 40.5 million. That is shareholder-friendly with a capital S. It is also where the debt from layer two went. Carlisle passes, and we check the balance sheet again next quarter. Layer #4: The Price Great business, safe dividend, good management. Is it cheap enough today? Two ways to answer it: The Buy Below. Every name in the Dividend School Universe carries one, a price we’ve already decided is worth paying. It is public on the Universe table at dividend-table.vercel.app. The hurdle. Starting yield plus dividend growth should clear 9%. This is step three of the “Don’t Chase” test, and it works on any stock, Universe or not. ADP: $269.94 against a Buy Below of $333.81, 19.1% below. The yield is 2.5% ($6.80 ÷ $269.94). Add a 9% growth rate, under both the dividend’s five-year pace and the latest raise, and we get 11.5%. Passes both ways. Microsoft: $501.61 against a Buy Below of $473.52, 5.9% above. The yield is 0.8% ($3.92 ÷ $501.61). The hurdle gives two different answers depending on the growth rate we pick: With 10.2% growth (the five-year pace): 0.8% + 10.2% = 11.0%, passes With 8% growth (the latest raise): 0.8% + 8% = 8.8%, fails When one point of growth decides the answer, the answer is “not yet.” Microsoft fails layer four. Carlisle: $314.70 against a Buy Below of still to be determined. The yield is 1.6% ($5.00 ÷ $314.70). Add the 1.6% yield to the 14% dividend growth, and you get 15.6%. Easy pass, with the buy below still to be calculated next month. Failing layer four isn’t a no. It’s a not yet. Microsoft is a wonderful business at the wrong price. Write the Buy Below down, put it on the watchlist, and wait. Patience is a virtue. How to Use the Filter in Your Process Here is how our four guinea pigs came out: Print the template and run it on the next dividend stock you’re thinking about buying. Start with a company you already own. It’s humbling, trust me. 4 Layer Dividend Stock Filter 125KB ∙ PDF file Download Download A few things I’ve learned doing this: Go in order. Layer one takes the longest, but it saves the most time, because we never value a business we don’t want to own. Write the numbers down. Every pass line, every result, and the date. Six months from now, we check whether anything moved. Re-run it every year. Carlisle and Microsoft both pass today with an asterisk, and next year we check the asterisks first. Common Mistakes to Avoid A few traps to avoid: Skipping layer one because the yield is juicy. Pfizer’s 6.2% is the whole reason people look at it. Treating coverage as a snapshot. Microsoft at 2.5x is fine; the trend from 3.4x is the story. Stopping at the dividend. Carlisle’s dividend is covered five times over; the buyback is the part funded with debt. Using ROIC on a bank. Use return on equity instead. Treating a layer four fail as a no. It means not yet. Dying Business or Generational Opportunity: Is McDonald’s a Buy? (16 min) My answer turned out to be neither. Three things I found: It’s cheap on paper. At $238, McDonald’s trades at 19.3 times earnings against a historical average of about 26. Margins are excellent, it throws off plenty of free cash flow, and the dividend is in no danger. Growth is the problem. Global same-store sales grew just 1.3% last quarter, below inflation. The moat is real, but I rate it thinner than most people assume. Fast-casual chains and GLP-1 drugs are both chipping at it. A 10-year Treasury pays about the same. Low-single-digit growth plus a dividend of about 3.2% works out to roughly a 5% return. The 10-year Treasury pays about 5.2% right now, with a lot less risk. The price where I’d actually start buying is at 14:03. Watch on YouTube → Disclosure: I don’t own McDonald’s. I do own Domino’s, which comes up in the video. Final Thoughts Buffett’s filters work for dividend-paying stocks. Follow the steps to filter for your next great idea. Understand the business, check the cash, watch what management does with it, and only then decide what we’re willing to pay. If you have any questions or would like me to cover something in particular, please don’t hesitate to reach out. Until next time, take care and be safe out there, Dave P.S. Every company in the Dividend School Universe has already been through all four layers, and we re-run the Buy Below on all thirty-five every month. Members get the Buy Below prices and the why behind them.

MCDMcDonald'sNeutralMcDonald's

1w ago

Is McDonald's a buy? (The live that wasn't)

Yesterday’s live didn’t go to plan. Audio gremlins took my mic out and I couldn’t get it back mid-stream. Sorry to everyone who showed up. The good news: I tracked down the problem, and I re-recorded the full walkthrough. It’s below. I cover what McDonald’s sells (hint: it’s mostly rent and royalties), how the moat holds up, where growth is coming from, and whether $238 is a price I’d pay. Grab a coffee and watch it. Hit reply and tell me if you agree with my verdict. — Dave Not investment advice. My own analysis.

ACNAccentureBullishAccenture

9/3/2026

5 Best Buys Now (September '26)

Market prices permanent decline despite strong FCF; buy below $227.35

AXPAmerican ExpressNeutralAmerican Express

9/1/2026

Qualified vs Ordinary Dividends: Why Does it Matter?

Two investors collect $50,000 of dividends this year. One pays $0 in federal income tax on them. The other pays $3,820. Same income. Same year. The difference is what kind of dividend it was and which account it was sitting in. Most of us pick the stock, click buy, and never think about which account we clicked buy in. This piece is the fix. In today’s post, we will discuss: What makes a dividend qualified The $3,820 mistake Where each kind of dividend belongs Real names, sorted by account Common mistakes How to use this in your process One thing before we start. I am not a CPA, and this is not tax advice. The numbers below are the 2026 federal rules, and your state, your bracket and your CPA all get a vote. If you have any specific questions related to your tax situation? Consult your accoutant and get advice to setup the accounts which best work for you. These suggestions below are a basic starting point, but if you have a more complicated portfolio or finances, a accountant will be worth their weight in gold. Okay, let’s dive in and figure out where our dividends should live. What makes a dividend qualified Every dividend lands on the 1099-DIV in one of two piles. Ordinary dividends get taxed like a paycheck, at whatever bracket we are in, 10% up to 37%. Qualified dividends get the long-term capital gains rates instead: 0%, 15% or 20%. So the whole game is getting into the second pile. Three tests, and the dividend has to pass all three. The company test. The payer has to be a US corporation, or a foreign one that either sits in a country with a full US tax treaty or trades on a US exchange. That last clause matters more than it looks, and we come back to it with TSM. The holding period test. We have to own the shares for more than 60 days inside the 121-day window that opens 60 days before the ex-dividend date. WARNING, the window straddles the ex-date, it does not start at it. Buy a stock the day before it goes ex-dividend and sell it three weeks later and that dividend is ordinary, no matter who paid it. The type test. Some payers are shut out by law regardless of the first two. REIT dividends. Distributions from partnerships. Interest that a fund passes through as a dividend, which is what bond funds and money market funds do. Those are ordinary by design. Why are REITs and partnerships shut out? Because they never paid corporate tax in the first place. Microsoft pays tax on its profit, then pays us a dividend out of what is left, and the lower rate is the IRS admitting the money was taxed once already. Realty Income skips the corporate tax entirely, so the IRS collects its share from us instead. The $3,820 mistake How big is the gap? Bigger than most investors think, so let’s put numbers on it. Say we are single, it is 2026, and our only income is $50,000 of dividends. The standard deduction is $16,100, so taxable income is $33,900 ($50,000 - $16,100). Now run the same $33,900 through both piles: All qualified: the 0% rate runs up to $49,450 of taxable income. Our $33,900 sits under it. Tax: $0. All ordinary: 10% on the first $12,400 ($1,240) plus 12% on the remaining $21,500 ($2,580). Tax: $3,820. Same $50,000. One version is free, the other costs $3,820 a year, every year. Higher up the ladder the gap narrows but never closes. In the 24% bracket we pay 15% on qualified dividends and 24% on ordinary ones, so every $10,000 of dividends costs $1,500 one way and $2,400 the other. One wrinkle for REITs, and it is a good one. The 2025 tax law made the Section 199A deduction permanent, and it knocks 20% off REIT ordinary dividends before tax. In our $50,000 example the deduction is capped at 20% of taxable income (20% of $33,900 = $6,780), so REIT income comes out at $3,006 rather than $3,820. I will take it, and it is still not zero. Where each kind of dividend belongs We cannot change what kind of dividend a company pays. We can change which account we hold it in, and the IRS treats the three account types completely differently: Taxable brokerage: every dividend is taxed the year it arrives, at whichever rate applies. Traditional IRA or 401(k): nothing is taxed until we withdraw, and then everything is ordinary income, qualified or not. Roth IRA: nothing is taxed, ever, once we clear the five-year rule and age 59 and a half. Notice what the Traditional IRA does to a qualified dividend. Income that would have been taxed at 15% comes out the other end taxed at our full bracket. No free lunch here. Shelter has a cost, and the cost is highest on the income that needed it least. So three rules, in order: A dividend that is already tax-favored stays in the taxable account. Qualified payers. Foreign payers, for a reason we get to in a second. Sheltering them wastes shelter. A dividend taxed as ordinary income gets sheltered. REITs and bond funds go in the Traditional IRA. Whatever we expect to grow the most goes in the Roth, because Roth space is the scarcest thing we own, $7,500 a year of it. A partnership breaks the shelter. More on that below with EPD. What if we only have one account? Then this article is a shrug, and that is fine. Buy the best businesses and move on. The rules above are for the day the second account shows up, which for most of us is a 401(k) rollover or the first Roth contribution. Real names, sorted by account Let’s run it on real companies, one structure at a time, with the tax bill per $1,000 of dividends for a reader in the 24% bracket. These are examples, not picks. Microsoft, Visa, American Express. Plain US corporations, so qualified. Yields of 0.9%, 0.8% and 1.2%, so the income is small to begin with. Per $1,000 of dividends: $150 of tax (15%). These live in the taxable account. Putting Visa in an IRA shelters $8 of dividends per $1,000 invested and spends room we need for something else. Realty Income and VICI. REITs, so ordinary, but look at what O actually paid in 2025. Of the $3.217 per share: $1.0819 (33.63%) was return of capital, not taxed at all this year. It lowers our cost basis instead, and we settle up when we sell. $2.1351 (66.37%) was ordinary income, and 199A takes 20% off that. Per $1,000 of Realty Income dividends: $336 untaxed, $664 ordinary, less $133 for 199A, leaves $531 taxed at 24% = $127. VICI ran heavier on the ordinary side in 2025, $1.7019 of $2.1975 per share, with only $0.0456 of return of capital. Either way these are the first names into the IRA. In a Roth the $127 becomes $0, and at a 5.3% or 6.2% yield that adds up. Main Street Capital. Here is where the internet gets it wrong. The standard line is that a BDC passes loan interest straight through as ordinary income, so it belongs in an IRA, full stop. Main Street’s own 2024 tax letter says otherwise. Of the $7.61 per share it paid, $2.42 was ordinary, $2.08 was qualified and $2.93 was long-term capital gain. Two thirds of it got the preferential rate. So where does MAIN go? Per $1,000, on that split: $76 on the ordinary piece, $41 on the qualified piece, $58 on the gains. $175 total. Higher than a qualified payer, lower than a REIT. So MAIN can sit in taxable if the IRA is full, and it goes in the IRA when there is room. Most other BDCs are pure lenders, and for those the standard line holds. We sort the whole group in the BDC piece later this month. Enterprise Products. Different animal. EPD is a partnership, so there is no dividend at all. We get a distribution and a Schedule K-1 in March. Most of that distribution is return of capital, which lowers our basis each year and gets taxed when we sell, part of it as ordinary income. In a taxable account that is one of the most tax-efficient income streams we can own. Put EPD in an IRA and the shelter can turn on us. Partnership income inside a retirement account counts as unrelated business taxable income. The IRA gets a $1,000 allowance, and above that the custodian files a tax return for the IRA and charges us for the privilege. Most years a modest position stays under the line. The year we sell is the year it jumps, because the gain from all that lowered basis lands on the final K-1 at once. Small position, rarely a problem. Large one, keep it in taxable and save the headache. TSM and LVMH. Foreign, and two things happen at once. Taiwan takes 21% off TSM’s dividend before it reaches us, and France takes its slice off LVMH’s. In a taxable account we claim that back as a foreign tax credit, up to $300 single or $600 joint without an extra form. In an IRA there is nothing to claim it against. The withholding is just gone. And the dividend itself? Taiwan has no tax treaty with the US, which should make TSM’s dividend ordinary. It is qualified anyway, because the ADR trades on the New York Stock Exchange and the code says a foreign stock readily tradable on a US market passes the company test. I love that rule. Both of these belong in taxable. Common mistakes Three I see over and over: Selling inside the 61 days. A dividend capture trade around the ex-date turns a qualified dividend into an ordinary one. The holding period is the rule most often broken by accident. Filling the Roth with the wrong thing. A 0.8% yielder in a Roth is shelter spent on income that was already taxed at 15% or less. The Roth is for the highest-yielding ordinary payer we own, or the fastest grower. Visa is neither. Trusting the yield on the screen. A 6% REIT yield and a 6% partnership yield and a 6% BDC yield are three different after-tax numbers in the same account, and the screen only shows the one before tax. One thing to keep in mind with all of this process. If you are investing less than the allowed amount for a Roth IRA annually, then put as much of your investments as you can in the Roth. Once you start to fill that up, then you can start to use different accounts for different investments, depending on your goals. How to use this in your process Here is how I am doing it now, and it takes ten minutes once a year (a little longer the first time, the 1099 is not a fun read). Open last year’s 1099-DIV. Box 1a is total ordinary dividends. Box 1b is the qualified piece inside it. Box 3 is return of capital. Box 5 is the 199A piece. If Box 1b is most of Box 1a, the taxable account is holding the right things. If it is not, we have a REIT or a bond fund in the wrong place. Then, before the next buy, ask one question. What kind of dividend is this? Corporation, qualified, taxable account. REIT, ordinary, IRA first. Partnership, K-1, taxable and keep it modest. Foreign, taxable, so the credit works. Same stocks, less tax. That is the whole trick. The checklist version of all this is above, one page, print it and stick it next to the monitor. What I would read next In a few days we will release a post covering the BDC universe and scored the ones paying 10% and up, which is the group this article waves at in one paragraph. If you own a BDC or are about to, that is where the tax question turns into a safety question. That one is for members. If you have any questions or would like me to cover something in particular, please don’t hesitate to reach out. Until next time, take care and be safe out there, Dave P.S. Want to know if your dividends are safe? Check any dividend payer in one free sheet. Every streak, payout ratio, and debt load for Coca-Cola, Johnson & Johnson, Realty Income, and 997 more. Straight from SEC filings, updated monthly. → http://stocksimplifier.com/dave