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These 3 Dividend Stocks Offer Surprisingly High Yields

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Investors around the world are feeling some pain. But periods of turmoil like this also generate significant opportunity to put capital to work. Valuations across most sectors have fallen, which increases the margin of safety for buyers of shares today. It also increases the likelihood of capital gains.

At the same time, dividend stocks now sport higher yields, as the yield of a stock and its price move inversely. In fact, the list of high-dividend stocks continues to grow as the market sells off, and it now includes some truly great dividend stocks, let’s look at three high-yield stocks for long-term income:

Smoking Hot: Altria Group

Altria (MO) is primarily a manufacturer and distributor of smokeable and other tobacco products in the U.S. The company owns the highly lucrative Marlboro brand, as well as Black & Mild cigars and pipe tobacco, moist smokeless tobacco brands such as Copenhagen and Skoal. In addition to those traditional tobacco products, Altria’s portfolio has On! oral nicotine pouches, and a large stake in Juul vaping products.

The company, which was founded in 1822, is trying to diversify away from tobacco products and aims to become a smoke-free company in the years to come. To facilitate this, it has taken large stakes in Juul, as well as Cronos Group. Altria produces about $21 billion in annual revenue, and trades with a market cap of $77 billion.

Altria has an exemplary history of dividend increases, which stands at 52 consecutive years. That makes Altria a Dividend King, having boosted its payout for at least 50 consecutive years. The defensive nature of tobacco products means that Altria naturally has recession resistance built into its dividend. That has helped the company with dividend safety and growth in the past, and we believe will continue to do so for the foreseeable future.

Altria’s average annual dividend increase in the past decade is quite strong at 7.8%. For a defensive company with a half-century of dividend increases, it is all the more impressive. While we don’t see that sort of pace as sustainable, given its already-high payout ratio, we do think Altria will continue to grow its dividend for many years to come.

We see modest earnings growth ahead, given the company is actively trying to shrink its tobacco portfolio over time. However, with the payout ratio at less than three-quarters of earnings, we see the likelihood of the company’s dividend increase streak continuing as very high.

Altria’s current yield is a staggering 8.8%, making it one of the highest-yielding stocks in the market today. Given this combination of dividend longevity and enormous yield, we like Altria for income-focused investors.

Sticky to the Upside: 3M Company

Our next stock is 3M (MMM) , which is a diversified technology and consumables company that operates globally. 3M has four operating segments: safety and industrial, transportation and electronics, health care, and consumer. Through these segments, the company offers thousands of different products, spanning from personal protective equipment to tape to wound care, and more.

Founded in 1902, 3M generates about $36 billion in annual revenue, and trades with a market cap of $73 billion. 3M also has a 64-year dividend increase streak, making it one of the best dividend stocks in the world on that measure. As a result, it too is a Dividend King.

Like Altria, 3M has a very impressive dividend increase pace in the past decade despite its immense longevity. 3M’s average increase in the past decade is 9.7%, although we don’t see that pace as sustainable. We currently forecast 2% annual dividend growth in the years to come as the payout ratio has moved higher than the historical range in the past few years; we believe 3M will rectify that by growing the payout more slowly than earnings. We see 5% earnings growth for 3M in the years ahead, so there should be ample capital to continue to raise the payout indefinitely. In addition, the payout ratio is expected to be just 54% for this year, affording 3M the ability to continue its significant share repurchases, in addition to raising the dividend.

3M’s yield is also quite good at 4.6%, and is well ahead of 3M’s normal historical range, indicating a relative bargain for income buyers today.

Get Inside Intel Corporation

Our final stock is Intel (INTC) , a company that designs, manufactures, and distributes computer products globally. Through its various segments, Intel offers CPUs and chipsets, accelerators, boards, graphics products, memory and storage, and more. Intel sells to original equipment manufacturers, and has a burgeoning cloud service business through its Mobileye segment.

Intel was founded in 1968, produces about $75 billion in annual revenue, and trades with a market cap of $149 billion. Intel is a relative newcomer to paying a dividend, but has raised its payout for the past eight years.

Over those eight years, the average annual increase has come to just over 6%, so dividend growth has been quite meaningful. Going forward, we see similar growth at 5%. That is where we assess earnings growth potential for Intel, and we believe management is happy with where the payout ratio is today. Thus, earnings growth and dividend growth should be similar.

Intel’s payout ratio is just 35% of earnings for this year, so the dividend is not only extremely safe, but has ample room to grow in the years to come.

Finally, Intel’s current yield is 4%, which is not only high on an absolute basis, but is very high by Intel’s own historical standards. Like Altria and 3M, we see the yield as indicating significant value in the stock today.

All three of these names offer cheap valuations and higher yields than we’ve seen historically, so for investors looking to build long-term income, we see all three as attractive today.

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American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.

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However bad the year has been for most stocks, it has been especially harsh for state-licensed cannabis sellers.

In just the past month, the


AdvisorShares Pure US Cannabis


exchange-traded fund (ticker: MSOS), which tracks America’s multistate operators—or MSOs—fell 25%, while the


S&P 500


dropped 7%.

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How Do Mega Backdoor Roths Work?

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A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.

Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.

Roth Account Basics

Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.

First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.

Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:

  • Single filers: MAGI of $125,000 or less

  • Married filing jointly: MAGI of $198,000 or less

  • Head of household: MAGI of $125,000 or less

You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.

Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.

What Is a Backdoor Roth?

A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.

But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.

How a Mega Backdoor Roth Works

A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:

You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.

If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.

Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.

You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.

Benefits of a Mega Backdoor Roth

There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.

You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.

Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.

Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.

So who is a mega backdoor Roth right for? You may consider this move if you:

  • Have an eligible 401(k) plan at work

  • Have maxed out traditional 401(k) contributions

  • Are not eligible to contribute to a Roth IRA because of your income

  • Have additional money that you want to invest for retirement

  • Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover

Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.

Mega Backdoor Roth Alternatives

If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.

Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.

Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.

Bottom Line

A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.

Tips for Retirement Planning

  • If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.

  • Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.

Photo credit: ©iStock.com/designer491

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Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.

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Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.

China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.


Alibaba


(ticker: BABA) and


Tencent


(0700.H.K.) were among the companies fined as a result.

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