Series: Building A Second Income Stream (Part 4)

How To Pay Almost No Taxes On High Yields

When most people think about earning passive income they picture getting taxed heavily on every dollar they make. But what if there was a way to collect high yields while paying little to no taxes on those payouts This isn’t just wishful thinking it’s a practical strategy that savvy investors are already using to their advantage

In this part of the series we’ll explore how certain income generating assets can deliver consistent cash flow in a way that dramatically reduces your tax bill. You’ll learn how this method works why it’s especially powerful in taxable accounts and how you can use it to build a more efficient and sustainable second income stream

How Return of Capital Can Supercharge Your Income Strategy

When investors chase yield they often focus on the headline number. But for smart long term income seekers the structure of the payout matters just as much as the size. That’s where Enterprise Products Partners (EPD) stands out not just for its 7% yield but for the way it pays you as a return of capital.

Let’s unpack why this matters and why EPD deserves a serious spot on your dividend watchlist.

EPD is a Master Limited Partnership (MLP) a business structure that offers unique tax advantages to investors. Distributions from EPD aren’t classified as ordinary income. Instead they’re considered return of capital (ROC) which has major benefits:

• No immediate tax bill on distributions

• Reduction in cost basis instead of taxed income

• Tax deferral until you sell your units potentially years down the line

In practical terms EPD lets you compound your income with far less tax drag. If you hold long enough your money keeps working and Uncle Sam waits.

You can technically hold shares of a company like EPD forever without paying taxes on the income if you never sell. This is why companies like EPD are likely to be around for a very long time. Looking back at the performance over the last five years, we can see that EPD’s price has increased by more than 70%. When including all dividends paid to investors, the total return is actually above 150% over the last five years.

The beauty of ROC is that it only works long term if the business is healthy and EPD is proving just that.

For Q1 2025:

• Revenue came in at $15.42B beating estimates by $1.42B

• Earnings per unit were $0.64

• Distributable Cash Flow (DCF) hit $2B providing a 1.7x coverage of the dividend

EPD’s business continues to deliver primarily through its Natural Gas Liquids (NGL) segment which saw strong volume growth and margin expansion. Even with headwinds in its petrochemicals unit the broader cash generation story remains robust.

💼 Capital Spending Ensures ROC Stability

Some investors worry that return of capital means a company is “giving back your own money.” That’s not the case with EPD. Its distributions are supported by real cash flow and management is actively reinvesting for future growth.

• $1.1B in capital spending this quarter

• $7.6B in projects under construction

• $6B of those projects expected to go live in 2025

This ensures future earnings and therefore distributions remain secure. ROC from EPD isn't a gimmick it's backed by a well run midstream business reinvesting in long term expansion.

If you missed last the segment in this series, you can check that out below.

🎁 Free Downloads to Get You Started

These are the two best resources for getting familiar with monthly payers and dividend growth stocks.

• ✅ 50+ Monthly Dividend Payers List
  A curated list of high-yield stocks and funds that pay monthly, perfect for building a ladder of recurring income.

• ✅ Dividend Growth Legends: 50+ Stocks with 25+ Years of Raises
  The most consistent dividend companies on the planet—some have increased payouts for over 60 straight years.

---

📊 Tool: Track Your Progress

Want to keep track of what you're earning, how much your portfolio yields, and where to reinvest?

• 📥 Dividend Tracker Template – $5
  Simple, powerful Google Sheet to track your holdings, income, yield-on-cost, reinvestment, and more.

🧠Starter Kit

Want to get a well-rounded idea of where to start your investing journey? I have you covered here as well!

---

📘 Full System: Go From $0 to $500/Month in Income

If you’re ready to build a scalable dividend income portfolio from scratch, with real structure, strategy, and support. You can start here:

• 🚀 The Dividend Income Blueprint – $25
  My complete guide that shows how I built over $3,000/month in passive income using a three-layer dividend system, reinvestment strategy, and sustainable yield portfolio design.

It includes:

• The strategy I use

• Portfolio structure breakdown

• Real examples + reinvestment tactics

• Income planning + risk controls

• Bonus: Checklist, glossary, & asset filters

🧮 Why ROC Works Best in a Taxable Account

Most investors instinctively stash yield assets in IRAs. But ROC flips the script. Because you’re not taxed on distributions immediately holding EPD in a taxable account can actually lower your tax bill. Here’s how: