In a perfect world, the calendar wouldn't matter when it comes to investing. Companies would always be fairly valued based on their future prospects, and major price swings would be rare events driven by substantial changes to those prospects. In the real world, however, the calendar matters. Investors make decisions on factors like which tax year an investment choice will impact or whether or not a sale qualifies for long-term capital gains tax treatment.
Those calendar-based decisions provide opportunities to investors too. With that in mind, three Motley Fool contributors came up with year-end investing strategies worth considering right now. They highlighted dividend stocks, tax-loss harvesting, and bargain hunting. Read on to learn more about each of those strategies, and find out how they can work for you as 2022 draws closer to its end.
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It pays to buy a payer
Eric Volkman: The end of the year is a time when a great many companies declare dividend raises. Since many of these stocks are cheaper than they have been in quite some time thanks to the ongoing market weakness, their dividend yields are approaching highs or setting new ones.
One of the wonderful features of the U.S. stock market is that it is stuffed with regular dividend payers. So for anyone who wants steady and reliable passive income from a stock, there are plenty of choices.
Want to go for a high-yield play? You might consider a real estate investment trust (REIT), which is obligated by law to pay out at least 90% of its taxable income to shareholders. This all but guarantees a regular dividend, particularly if it comes from a veteran operator like retail properties specialist Realty Income. The company's payout -- dispensed monthly, no less -- yields 4.8% as of this writing.
Typically a rung or several down the yield ladder are blue-chip stocks, established businesses that have been mainstays on the market for years. Not all of them pay dividends and with those that do, yields can vary widely. Still, there are some relatively high-yield plays here too. For example, in the healthcare sector, AbbVie is a $260 billion industry giant with a yield above 4%.
Finally, there are the high-fliers that aren't (yet) high-yielders, but they can offer an appealing combination of share price growth and income. In this category, there are names like Apple and MGM Resorts International, a casino operator that's pushing into the high potential online and mobile betting segment.
There are dividend stocks of all shapes and sizes, for any type of investing style. It's good to mix and match among these categories, of course, but diversification usually comes down to personal taste and appetite for risk. Regardless, now's a great time to buy a dividend-paying stock or several.
Investors can make the best of a down year in 2022
Parkev Tatevosian: As the end of a challenging year for the market approaches, there is one strategy that makes the best of this situation. The bear market in 2022 makes it likely investors have holdings in their taxable brokerage accounts that are down significantly. For any stocks where your investing thesis no longer holds up, sell them and take advantage of the capital loss at tax time next year.
Specifically, the IRS allows investors who sell stocks at a loss to use those losses to reduce their tax liability. First, capital losses can offset your capital gains if you're fortunate enough to have them in 2022. But if you're like most investors with only losses to report this year, you can use them to deduct up to $3,000 annually from other sources of income like salaried wages and business earnings.
Not only that, but the IRS allows you to carry forward excess losses to future years, meaning you could harvest $10,000 in capital losses right now, take the $3,000 deduction for 2022, and still have $7,000 left over to offset future capital gains or income.
Before running with this strategy, there are other topics you must familiarize yourself with like the wash-sale rule and the effect of different holding periods on your deductions. But taking advantage of tax-loss harvesting could help you make the best of a forgettable year.
It's time to go bargain hunting
Chuck Saletta: The tax-loss harvesting strategy Parkev outlines above may be very tempting in this market. When investors start selling for tax reasons or to escape from this year's volatility, it can often put undue pressure on a company's stock price. After all, to the market, a seller is a seller, regardless of whether that person is looking to get rid of a dud of a company or simply manage their tax bill. The market finds its clearing price by balancing buyers and sellers, and if there's an excess of sellers, it tends to drive prices down.
While the overall market has spent substantial portions of 2022 down more than 20%, there are plenty of companies that have fared even worse. Some of those companies may have seen their shares get downright cheap from a valuation perspective, but for investors focused on the tax benefit or just cutting their losses, the valuation may not matter all that much.
That's where you can step in with your bargain-hunter's mentality and buy shares of solid companies at value prices. With a tool like a discounted cash flow model at your side, you can get a decent estimate of what a stock is really worth. If the market is asking for a much lower price, it could very well be a bargain just waiting for your purchase order.
It's important to note that any valuation model will at best get you a reasonable estimate. You are attempting to predict the future after all, and a company's numbers are never certain until it closes its books. Still, even with that uncertainty, if the ups and downs from a lousy year in the market make bargains available, this year-end season just might be the best time to seek out quality companies at value prices.
The clock is ticking
Regardless of what you do with your portfolio, 2022 will draw to a close in the not too distant future. If you want to take advantage of the calendar to buy dividend stocks, engage in tax-loss harvesting, or seek out bargains, your opportunity comes with an expiration date. Get started now, and give yourself the most time you can to put your plans in place.
