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Portfolio Update

Some End-Year Sales

By Roger S. Conrad, on Dec. 20, 2017

Time is running out on 2017—and with it, investors’ opportunity to book tax losses on lagging positions. Adding to the urgency is the fact that losses this year are likely to be worth considerably more than next year’s for many Capitalist Times Premium subscribers. Congress is reducing statutory rates for individuals, at least temporarily.

So far this tax loss selling season, the Lifelong Income Portfolio has waited on the sidelines. That’s in part because this has been a relatively good year, but also because we view our stocks and funds as primarily long-term holdings.

Only by sticking with a dividend paying stock over a period of years do you get the two key benefits of a rising payout: A growing stream of income and the capital gains that follow as cash flow grows. Our recommendations are historically far less volatile than the typical stock, with core businesses resilient throughout the economic cycle.

With this historic bull market in stocks on the verge of entering a 10th year, however, even the most selling-averse investors need to shift their strategies, at least slightly.

That means taking three simple steps to prepare for tougher times, while staying in the game for whatever gains are left. And tax loss season is the perfect time to make the needed moves:

First, sell all stocks, bonds, preferred stocks and other securities of any companies you own that lack the underlying business strength to weather the cycle. Telltale signs of weakness include heavy debt, decaying margins, reduced dividend coverage and shrinking revenue. If a company is showing these trouble signs now with the economy growing and capital markets open, imagine what would happen if the macro environment took a turn for the worse!

Second, take full or partial profits on stocks and other investments coming off big gains in 2017 that have left them at prices above our buy targets. This is especially true if those elevated prices represent measures of standard valuation (e.g., price/earnings ratios, dividend yields) that haven’t been sustainable historically.

Three, keep the cash from steps one and two in a highly liquid investment you can use to buy stocks of best-in-class companies when prices go lower. We suggest the Lifelong Income Portfolio Conservative Holding Vanguard Intermediate-Term Tax-Exempt (VWITX). The fund holds nearly 7,000 individual bonds issued by municipalities for a wide range of purposes, most rated A or better and maturing in an average of five to 10 years. Its expense ratio is just 19 basis points, allowing the fund to produce a tax-advantaged yield a shade lower than 3 percent while controlling credit and interest-rate risk.

Even with the bull market running higher this past year, there have been excellent opportunities to buy best-in-class Lifelong Income Portfolio names at temporarily depressed prices. Both AT&T (NYSE: T) and Verizon Communications (NYSE: VZ), for example, are higher by roughly 20 percent since early November.

Freeing up cash by selling both weaklings and high flyers ensures you’ll be able to take advantage of future opportunities.

What To Sell

We currently see opportunities in the Portfolio to raise cash by selling potential weaklings, as well as by taking full and partial profits on several particularly extended names.

Earlier this year, we recommended parting ways with three holdings. In April, we took a profit of 27 percent on closed-end fund PIMCO Strategic Income (NYSE: RCS). A month later, we advised cashing out of VTTI Energy Partners LP (NYSE: VTTI) for an 8.3 percent total return after the share price closed in on the all-cash takeover price. And in early July, we swapped Kinder Morgan 9.75% 10/26/2018 Mandatory Convertible Preferred (NYSE: KMI A, CUSIP: 49456B200) for Kinder Morgan (NYSE: KMI) common shares, booking a 27.5 percent total return in the process.

These sales produced taxable gains. But they also saved us from 10 percent hits to capital in the PIMCO fund and the Kinder preferred. And that would have been a greater loss to principal than any tax owed.

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