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In your hunt for solid dividend-paying companies, you will often encounter three special kinds of corporations. They have chosen to produce themselves under federal laws that allow them to avoid corporate taxation in case,granted that they pay out, or distribute, the bulk of their profits to shareholders. For this reason, these associates appear often in lists of high-yielding dividend-payers. All three special forms of associates have ticker symbols, and their stocks trade just as other associates trade.

Here is a primer on these three special corporate forms:

Real Estate investment Trusts (Reits)

Reits were created by Congress in 1960. They come in two flavors: Most Reits are essentially landlords, holding properties from office parks to apartments to shopping malls. A far smaller amount of Reits are "mortgage Reits," complex in real estate financing.

To qualify as a Reit, a enterprise must distribute at least 90 percent of its assessable earnings in the form of dividends. Historically, most of the return from Reits has come from these dividends, although many have delivered spellbinding price returns to boot.

Reits are the only practical way for most individuals to spend in residential and commercial real estate developments. Real estate is often thought about to be a obvious asset class (beyond the "big three" of stocks, bonds, and cash), so Reits offer the investor some diversification benefits. Current dividend yields often are 5 to 8 percent or more, right out of the gate for new buyers.

Note, Reit dividends do not qualify for the 15 percent federal earnings tax rate on most dividends. They are taxed to the shareholder as ordinary income. That is because the earnings were not taxed at the corporation's level.

Master itsybitsy Partnerships (Mlps)

Mlps are also a special form of structure. In fact, they are not corporations at all, but partnerships. By law, their activities are itsybitsy to the production, processing, and converyance of natural resources, plus some operations in real estate.

Mlps appear mostly in the oil and gas industry. They supply small investors a way to share in pipeline partnerships and other oil and gas operations that otherwise would not be possible. Because the shares trade, beyond the partnership distributions there is also the usual inherent for capital gain or loss.

Every Mlp has a general partner which manages and controls the partnership. Shareholders in Mlps (technically "unit holders") are itsybitsy partners in the enterprise. They own an interest in the assets of the business, which in turn entitles them to dividends and other distributions, and also to advantage from depreciation of the assets of the business.

Taxation of Mlps was established in 1987 by Congress. The partnership does not pay taxes itself, so the distributions sent to unit holders do not qualify for the federal 15 percent cap on dividend income. However, not all of the distribution sent each quarter to unit holders is a "dividend." Some of it is a return of the former capital invested. The returned capital, in effect, reduces the cost basis of the investment (as if the shareholder had spent less per share in the first place). Returned capital is not taxed in the year it is distributed, but it is taxed when the unit possessor sells the shares. That is because there will appear to be more profit on the sale of the shares, since the returned capital over the years reduced the cost basis. So the returned capital is not, as is sometimes stated, non-taxable; rather the taxation is deferred. When you ultimately sell those shares, the taxation catches up to the capital returned over time.

Because of their unique structure and tax situation, Mlps must mail an Irs schedule K-1 to each unit possessor every year. This reports the unit holder's share of the partnership's assessable and non-taxable income, gain, loss, deduction, and credits. It is de facto not that difficult to deal with, and any competent tax preparer is familiar with K-1's.

Business improvement associates (Bdcs)

Bdc's were created by Congress in 1980 to help supply capital to small businesses. They have been much in the news lately, commonly under the term "private equity," as there have been dozens of new deals in which associates have been "taken private." That means that social companies-some of them quite large-have been bought in their entirety by underground equity associates with huge amounts of capital at their disposal.

Many of these underground equity deals have been made by associates which are truly private, but some of the underground equity firms have themselves decided to go public, becoming Bdcs. (Never mind that the size and nature of the resulting entity and its investments may be far exterior the former purpose and spirit of the law.) When a underground equity firm is itself public, that means that the personel investor has a chance to share in "big deals" that would otherwise not be possible.

The law requires Bdcs to at least annually distribute the bulk of their net investment earnings and capital gains to shareholders. Thus they often have spellbinding dividend yields. As with Reits, these dividends are not field to the 15% cap on dividend tax rates for their recipients. And since the shares of Bdcs trade, there is the inherent for capital gain or loss related with any social company.