One of the issues that many retired investors face is the lack of cash to take advantage of good opportunities as they present themselves. Since most retirees have no regular "paycheck" coming in, they need to be nimble in their use of both their cash reserves, as well as the actual portfolio itself.
Using the Team Alpha portfolio as an example of how some could manage that issue, I will outline just a few steps to build some cash to re-deploy.
Our Team Alpha portfolio now consists of Apple (NASDAQ:AAPL), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NYSE:CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Linn Co, LLC (NASDAQ:LNCO), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), General Dynamics (NYSE:GD), and iShares S&P U.S. Preferred Stock Index Fund (NYSEARCA:PFF).
Trimming Positions To Add Others
First let's take a look at the portfolio allocations:
|Starting Lineup||Allocation% Goal|
Then, let's look at our most recent update:
|Stock||#Shares||01-27 PPS||TotValue||Orig. Price|
As you can see, some of the more heavily weighted stocks have also increased in share price. Taking some profits in selected stocks makes sense even while the entire portfolio does not require re-balancing.
- Profits can be locked in for actual gains rather than "paper" gains.
- A slightly lower allocation in stocks that have appreciated in value will have a "natural" re-balancing affect in those stocks.
- Cash raised by the partial sale of some positions can be used to take advantage of other opportunities, or to be kept in reserve as "dry powder" for future opportunities.
- Cash can also be re-deployed into other existing stocks to either take advantage of price dips, OR to tweak the dividends received.
- If need be, the entire portfolio can be rebalanced to reflect different allocations for each security as well.
As most of my readers know, I believe we are in a secular bull market and feel that financials will outperform virtually every other business segment. With that being said, let us assume that we could reduce our allocation in the defensive stocks that tend to perform better during down markets, or at least give us more stability.
For the sake of argument, let us also assume that we have decided to purchase shares in a stock I just wrote about, PennyMac Financial (NYSE:PMT).
The reasons an investor would be interested in owning shares of PMT are outlined in this article, and the main opportunity we could be seeking is the very nifty dividend yield of 8.50%. Since the stock is in a sector that we currently do not have in the portfolio, there would be no overlap either.
The stocks that come to my immediate attention are MCD, JNJ and T. Each of these stocks have shown solid gains thus far and have lower dividend yields than that of PMT.
The Possible Actions That Could Be Taken Now
By taking some profits in the stocks I mentioned, we could have available cash to redeploy. Here is how this action would look, as an example.
- Sell 25 shares of JNJ at $75.00/share today: Net $1,875
- Sell 50 shares of T at $35.00/share today: Net $1,750
- Sell 50 shares of MCD at $95.00/share today: Net $4,750
This will give the investor a total of $8,375 plus existing cash reserves of $1,691, for a grand total of cash on hand of $10,066. A sizable portion can be used to purchase enough shares of PMT to have a meaningful dividend impact on the entire portfolio without over-allocating.
As of right now, shares of PMT are trading at about $27.00/share. A 3% allocation would be roughly $4,000 on a portfolio value of $134,000, as Team Alpha has.
A purchase of 150 shares would cost about $4,050 and would increase the current yield of the portfolio from 4.63% to a drop over 4.70% (a very rough estimate). While this is not a huge amount, it IS a "raise" of sorts, to the income derived from the portfolio.
It also adds another dividend opportunity stock, while maintaining a position in all other stocks.
What About Capital Gains Taxes?
Obviously by taking profits, we have made some money, and there will be taxes due. If an investor has stock losses that can be carried over, those can be used to lower the taxable amount on the capital gains. If not, then the investor can take another look at this portfolio to see if an opportunity is there to sell a "loser" to offset the capital gains from the actions taken.
The one stock that comes to my attention is WMT. Right now there is a paper loss of roughly $500 if the stock was sold. The approximate capital gains from the sale of the shares that made money is roughly $1,275. By selling WMT, the $500 loss can be used to reduce the gains down to $775, and based on one's actual income tax rate, that amount would be deducted from the gains for a more accurate picture of how this has worked. Using an average rate of 20%, the net, net gain would come to roughly $1,120 (20% of $775 is $155, deducted from the total gain of $1,275).
The key here is to not let a potential tax liability stand in the way of an action that could make perfect sense for your financial circumstance and investing goals. Keep in mind that after all is said and done, PMT will be added to the portfolio, and only WMT would be removed (if so desired), still maintaining a well balanced, well diversified portfolio, with allocations that make sense.
The Bottom Line
While I have not decided to make these changes for Team Alpha, I realize that many readers might have different goals and needs. I have outlined these actions to show the flexibility of actually having a portfolio to work with, even though cash on hand might be very tight.
There are many ways to make things happen and to "skin a cat," and this is just one of many strategies I happen to like myself.