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We Need to Talk About RETURN OF CAPITAL (Dividend Red Flag?)

Return of capital is a complicated and often misunderstood issue. However, it's something any dividend or income investor should be aware of, so I'm breaking down all the details. 00:00 - Intro 1:02 - What is Return of Capital? 2:28 - Return of Capital Tax Treatment 5:32 - What Happens When Your Cost Basis Reaches $0? 6:25 - Return of Capital Inside Retirement Accounts (Warning) 8:37 - Is Return of Capital a Red Flag? 10:42 - Constructive vs. Destructive Return of Capital 11:56 - Return of Capital Warning & Tips 🚨 Subscribe to the channel: https://bit.ly/2SfWumJ 🚨 ••••••••• LINKS & RESOURCES 📈 Start investing in on the platforms below for FREE stocks & more: WeBull (4 FREE stocks with $100 deposit): https://act.webull.com/po/y2btyphGBX3... Robinhood (Get a free stock up to $500!): http://join.robinhood.com/tylerm27 M1 Finance (Get $30 free!): https://m1.finance/apNm3hKCZsWC Interested in camera stuff? Here's the equipment I use to shoot my videos: https://amzn.to/3jE8Ktp ••••••••• Return of capital is when you receive a dividend distribution that contains cash from your initial investment. Return of capital is primarily seen in investment funds, and it’s most commonly seen in income-focused funds and investments, because it’s a tool that can be used to provide higher distributions to shareholders. Return of capital technically comes from the fund’s NAV, or net asset value. The important thing to consider, though, is how a return of capital impacts us as investors, specifically regarding taxes and the value of our investment. A return of capital is not a taxable event, because on paper, you’re just getting back the money that you initially invested. In the short-term, this can make a return of capital very attractive for investors. However, this does impact your adjusted cost basis, which will have additional tax implications. Because of this unique treatment, return of capital distributions are often referred to as tax-deferred. You don’t owe taxes when you receive them, because they’re deferred to the point in time when you sell your shares. Ultimately, it gives investors more control on when they realize their tax obligations, providing a little more flexibility. With its long-term benefits, many people assume that investments paying out return of capital distributions are a great fit for retirement accounts. However, this may not be the case. These retirement accounts kind of eliminate the tax benefits of return of capital because they'll build up tax-free in the account no matter what type of dividend they are. With pre-tax accounts, you'll even trigger a tax hit when you withdraw. So overall, unless you really like the investment, there’s no great reason to seek out return of capital for retirement accounts, because their benefits are so much more impactful within a taxable account. A return of capital isn’t always a good thing. In fact, it can be a huge red flag that an investment fund isn’t generating enough returns to continue driving portfolio growth and providing distributions to investors. If this continues over the long-term, it can be very dangerous for the longevity of the fund. Over time, if the fund fails to produce enough returns and continues paying out distributions from its NAV, the NAV will decrease. And obviously this isn’t sustainable, because it will eventually go to zero if it’s paying out more money than it’s earning. Return of capital alone isn’t a red flag, but it does require a closer look to determine whether it’s a constructive or destructive return of capital. If the fund is paying out any return of capital and the NAV is growing, it could be considered a constructive return of capital. On the other hand, a destructive return of capital can be identified when the distributions of the fund are greater than the total returns. This means that the return of capital distributions are eating away at the NAV, eroding your initial investment and threatening future distributions. It’s also possible that there’s a mix of both going on, which is why it’s important to understand all of the aspects of return of capital and take a closer look at any investments that use these distributions. ••••••••• DISCLAIMER: NOT FINANCIAL ADVICE. The content in this video should not be used as the basis for any investment decision, as it is for entertainment purposes only. Additionally, some of the links contained in this description are affiliate links. I may earn a commission via Amazon, WeBull, M1 Finance or Robinhood should you choose to purchase or sign up at the links provided.