The New Year's champagne has fizzled out. And as a consequence of the fiscal cliff, investors are bracing for pain in 2013. Savers will share more of their investment gains with Uncle Sam as dividend and capital gains taxes are set to increase . But there are some simple ways we can restructure our portfolios to ease the burden.
Bond guru and PIMCO founder Bill Gross recently unveiled his recommendations for investors to reduce their higher dividend and capital gains taxes. His tips for beating the "wealth tax" include the following three suggestions.
Keep inflation in mind
According to the laws of physics, what goes up must come down. The laws of interest rates suggest that what goes down must eventually come up. Put simply, the days of rock-bottom interest rates can't last forever. Accordingly, Gross recommends investors buy TIPS, or Treasury Inflation-Protected Securities, which provide defense against inflation.
We buy TIPS when we feel interest rates are heading up, since the value of this type of investment increases with inflation. TIPS are indexed off the Consumer Price Index and purchased with maturities of five, 10, and 30 years. Gross believes our current low-interest-rate environment will continue in the near future as policymakers around the globe attempt to kick-start their economies. He recommends buying the shorter-duration TIPS with five- and 10-year maturities.
Gross also recommends holding real assets, including gold, despite its recent price decline. The bond guru favors investments that won't be left in the dust when the global economy heats up and is rife with inflation.
Invest in emerging economies
Developing economies with appealing balance sheets hold promise, according to Gross. He specifically calls out countries like Brazil and Mexico and feels these growing economies are great buying opportunities. Consider adding a few growing companies that possess ample Latin American exposure to your portfolio.
For example, Mondelez International (MDLZ 1.81%) already holds vast -- yet still growing -- emerging market exposure. The global snack food and beverage company obtains over 80% of its revenues from outside North America. Amazingly, 44% of total revenues are derived from developing markets -- most notably, Latin America. The company has recently enjoyed double-digit top- and bottom-line growth. It also possesses dominant global market share in every one of its snack and beverage categories.
Meanwhile, DIRECTV (DTV +0.00%) provides entertainment primarily in U.S. and Latin American markets. The company serves roughly 20 million subscribers in the U.S. and nearly 15 million in Latin America, with Mexico enjoying record levels of DIRECTV customers. Since 2009, the company has grown revenues by 12% annually. DIRECTV hopes its foray into streaming services will propel it to further revenue and margin growth.
Load up on dividend stocks
Gross recommends investors buy stocks that offer steady cash flow and dividends. Look for companies that have a history of paying dividends -- and increasing them -- during periods of economic uncertainty and instability. Look for stocks that boast consistent dividend growth and can weather a downturn.
Gross points to examples of such companies like Coca-Cola (KO 1.46%), Johnson & Johnson (JNJ 0.25%), PepsiCo (PEP 0.86%), and Procter & Gamble (PG 2.57%). All four of these companies were founded well over a century ago. They've continued paying their dividends through the recent Great Recession. These companies are also considered Dividend Aristocrats, meaning they've not only paid a dividend annually, but also consistently raised their dividend every single year for two decades. Impressively, these companies have ratcheted up their dividends for much longer than that.
Take a look at how consistently these stocks have paid and increased their dividends.
|
Company |
Dividend Yield |
5-Year Dividend Growth Rate |
Number of Years of Consecutive Dividend Increases |
|---|---|---|---|
|
Coca-Cola |
2.7% |
7.9% |
50 |
|
Johnson & Johnson |
3.4% |
7.8% |
50 |
|
PepsiCo |
3.1% |
8.7% |
40 |
|
Procter & Gamble |
3.3% |
9.8% |
56 |
Sources: Yahoo! Finance, The Motley Fool, companies' Investor Relations departments.
Typically, solid dividend-paying companies like Coke, J&J, Pepsi, and P&G are good investments in rough economic times and great investments during periods of economic prosperity.
Foolish bottom line
Unfortunately, all investors will pay more taxes this year. But by implementing these three simple steps and fine-tuning your portfolio, the tax bite won't hurt you quite so badly.
