After another solid week of performance, the real-money Inflation Protected Income Growth portfolio finished this past Friday up more than $540 since last week’s close. That gain gives the portfolio a better than 22.5% total return in the eight months since it was launched. That would have looked extraordinary in an ordinary market, but in this market, it’s just about in line with what you would have gotten by buying an S&P 500 tracking fund and taking the dividends as cash.
Regardless of whether those gains were driven by fundamentals or by the market’s rapid ascent, after a gain like that, it’s only natural to consider whether it’s time to start selling. After all, the market can be incredibly volatile, and the same emotions that lift stocks skyward can take them plummeting back to Earth. The IPIG portfolio may have made it this far and achieved those returns without selling a single share of stock, but that track record can’t last forever, can it?
When there will be selling
The primary goal of the IPIG portfolio is to attempt to build an income stream that rises faster than inflation. To do so, the portfolio looks to buy shares in companies that have a history of paying and increasing dividends and look capable of continuing to do that. To try to protect the overall income stream from the reality that dividends are not guaranteed payments, the portfolio pays attention to valuation, balance sheet strength, and diversification as well.
A pick can be sold if it no longer looks capable of maintaining or increasing its dividend, if its shares run well beyond what looks like a reasonable valuation, or if its balance sheet becomes over-leveraged. A pick can be sold for several other reasons, too, such as the fact that electricity generator NV Energy, Inc. (NYSE:NVE) is expected to be bought out for cash early next calendar year.
NV Energy, Inc. (NYSE:NVE)’s buyout means it’s only a matter of time before those shares are sold. Since the company recently decided to maintain its dividend, there’s no pressing need to sell at this time. Indeed, waiting until 2014 will give the IPIG portfolio long-term capital gains treatment on the gain.
Aside from that pending forced sale, a few other picks are being watched closely for being potentially sold. Package delivery giant United Parcel Service, Inc. (NYSE:UPS) is under the microscope because its balance sheet took on significant leverage to help its pension. While the goal of a well-funded pension is admirable, the risk of too much debt can offset the benefits from pension funding.