Turn the Stock Market Into Your Personal ATM: Unlock Tax-Free Passive Income!
These stock tickers are like a secret money tree that gives you non-taxable distributions with low market risk.
I’ve been investing in a group of stock tickers that give out over 10% in dividends every year.
And guess what? They’re even tax-free!
I’ve even found a way to make those dividends double.
I’m writing a series of posts on these different strategies.
If you’re a PIMM Pro Trader with a paid subscription, you’ll be able to access the entire article.
I highly recommend signing up for this great deal below so you can start earning tax-free income in the stock market.
My Journey In Tax-Free Income
My Initial Investment
In late 2021, I discovered a stock ticker family that provides high-yielding dividend returns—10% yearly.
I decided to invest some money in these investments.
I started investing in these stocks in early 2022.
Unfortunately, I failed to realize that the stock market was going into a bear market. When it became apparent that we were in a bear market, I had already invested several thousand dollars.
Fortunately, these investments did not drop as hard as the rest of the market.
Reinvesting
Although upset with myself, I decided to reinvest the dividends to offset the losses with dollar-cost averaging.
Every reinvested dividend payment would have a lower entry price than my initial investment.
The following month, that dividend reinvestment would earn a higher dividend payment rate since I had more shares per invested dollar than my initial investments.
The initial investment loss took about two years to recover since a bull market followed in late 2022.
Meanwhile, the dividend payments were growing in value.
Tax-Free Discovery
I was worried about my tax liability in early 2023.
I had reinvested the dividend payments and did not have extra cash to pay the taxes on those earnings—or so I thought.
When I filed my taxes, I noticed my tax liability did not increase, and I wanted to know why.
The 1099-DIV form classified these dividends as Non-Dividend Distributions, which are non-taxable under current U.S. tax law.
Entry Point Adjustments
“Where is the catch,” I thought.
I looked at my brokerage and saw that my initial investment losses were lower than expected.
I used a Google Sheet to track my entry point and sales prices.
Although my Google Sheet still showed over a 10% loss, my brokerage showed me close to breaking even.
I realized that every dividend payment reduced my entry price by that same amount.
For example, the brokerage would adjust an entry price of $20 per share by $0.16 monthly.
After one year, my dividend payments would be around $0.20 per share (10% yearly), and the adjusted entry price would be $18 (10% lower).
The stock price would have been around $15 during the bear market but could have been around $17.50 a year later since the bull market had started.
Thus, my initial positions were close to even.
Capital Gains
It was nice.
I would not pay taxes on the dividends, but I would pay capital gains taxes when I sold the positions.
In about ten years (assuming a 10% yearly dividend), my initial position would be a 100% gain.
The following dividend payments would be taxable since there would be no more entry price to subtract from.
The adjusted entry price would be $0 by that time. I will find out in several years.
Supplementing My Income
In early 2023, my job reduced my salary and hours by 75%.
I needed to supplement my income but had trouble getting another job. It took me four months to find a new job.
I decided to stop reinvesting my dividends and use them to pay my monthly bills.
These dividend payments (along with my emergency fund, odd jobs, and faith in God) helped me survive these four months of financial strain.
When I later found another job, I continue reinvesting these dividend.
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How These Investments Work
Earlier, I shared how these investments work, but I want to go into deeper depth with examples.
Let’s say you bought one share at $20 and it pays 1% in distributions every month.
After the first month, you received a $0.20 distribution and your brokerage adjusts your entry price to $19.80.
After the first year, you received $2.00 in distributions and your brokerage has adjusted your entry price to $18.
When you file your taxes, those $2 in distributions are consider Non-Dividend Distributions in your 1099-DIV form.
They are classified this way because you were given back $2 that you already put in.
You were given back your initial investment.
Assuming the market price for the investment is still $20 per share, you will have $2 in unrealized gains.
You do not have to pay taxes until you sell the investment.
Let’s say it’s been 100 months later.
You will have received $20 in distributions.
Your entry price is now $0 and you have unrealized gains of $20.
In 100 months, you have been getting tax free income and your initial investment has doubled.
You only have to pay taxes if you sell the investment.
The Market Risk
Like every investment in the stock market, there is risk.
I would classify this risk as low.
Here is why.
The investment has been paying distributions every month since January 2014.
The price drops less than a sell off in the rest of the market.
Let’s say you are down 20%, you will be back to even within 20 months assuming a consistent 1% monthly distribution.
But, the price never recovers back to its old high unlike the SPY and QQQ that eventually get back to new highs after a bear market.
The reason the price does not recover is because the entry price is always dropping.
Yet, reinvesting the distributions provides a greater return on your investment.
I will be sharing charts in just a moment.
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What Are the Investments?
If I haven’t gotten your attention by now, these is no point to read on.
These are the four investments I have tried out:
These funds invest in covered calls for the related index.
For example, QYLD is the Nasdaq 100 Covered Call ETF.
QYLD will invest in covered call options for the stocks in the Nasdaq 100.
Options have a lot of upside potential, so they can generate enough funds to pay those dividends.
The QYLD pays a yearly dividend of about 12%, making it the best of the four investments.
The price of the QYLD increases at a higher rate, similar to the Nasdaq 100 (or QQQ).
In the chart below, you can see how the QYLD price gets lower over time as mentioned in the market risk section.
This means the monthly distributions will get lower over time since it pays 1% distributions based on the current market price and not your entry price.
But, here is the beauty.
If you reinvest the distributions, you will be buying back in at a lower price.
This means, you will be getting distributions closer to your entry price on your new entries.
The chart below show the price if it is adjusted for reinvestments.
Not only are you keeping your distributions at a good rate (and remember that they are returning your initial investment every month), your unrealized gains are going higher.
Now let’s talk about the DJIA.
The Dow Jones outperformed the market a while back.
As a result, the DJIA’s price increased faster than the other ETFs during this time.
The XYLD is a good one, too, since it tracks the S&P 500 (or SPY).
The RYLD is the worst performing since it tracks the Russell 2000 (or IWM), which has not participated much in the bull market since late 2022.
I would rank QYLD as having the best performance.
XYLD is next, followed by DJIA, and RYLD is the worst.
These investments might be worth your consideration if you can leave your cash untouched for two to ten years.
Two years because recovering from a bear market will take that long.
Ten years because the initial investment price should drop to $0 by then.
Thus, in year ten, you would have gotten all your money back in dividends and have doubled your initial investment.
These investments might also be suitable to consider if you are looking for a passive income or are willing to reinvest those dividend incomes to try to double your money faster than 10 years.
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Disclaimer: The author of this post is not a financial advisor. The information provided herein is not financial advice and should not be construed as such. This content is intended solely for educational purposes and should not be used as a basis for any financial decision-making. Investing involves risk, including the potential loss of your invested capital. Only invest what you are willing and able to lose.