TAKING STOCK: A second opinion

Dear Mr. Berko:

Like most investors, I need higher income from my portfolio, which currently yields 3.1 percent. My broker wants me to sell 150 shares ($10,000) of Johnson & Johnson, which I bought in 2005 at $68 and are still $68 ... He wants me to raise another $15,000 and sell 300 shares of Vanguard Dividend Appreciation Fund, which I bought in June of 2008 at $56 and are now $58. He wants to use the proceeds to buy an ING variable annuity where he says I can withdraw 6 percent annually without penalty. Could I have your opinion?

HB in Akron, Ohio

Dear HB:

Annuities, annuities, annuities! Holy Moses, Mary, Mark and Luke; it seems that every broker wants to sell us an annuity. I can understand why. The commissions range between 6 percent and 12 percent, the annual fees (mortality, management, bookkeeping, etc.) range between 2.5 percent and 4 percent, and the selling broksters also get a slice of those fees each year called a "trail commission." Most annuities are painted by your broker to look like peacocks, but after you've owned them for a while, they begin to molt and look like sparrows.

Now HB, please ask that salesman to carefully explain how ING (a fine company) can pay 6 percent a year. And be mindful that your ING annuity must earn 9.25 percent yearly (after subtracting their 3.25% annual fees) in order to pay you 6 percent. The only people in this country who earn 9.25 percent a year on their investments are members of Congress, retired members of Congress and members of various state legislatures.

Selling Johnson & Johnson (JNJ-$68) is a bad idea. Admittedly, the stock price hasn't done diddly squat, but I'm going to give you a guaranteed maybe that in the coming four to six years, JNJ's stock price could be 50 percent higher than it is today. Another reason to hold JNJ is its ample $2.44 dividend yielding 3.7 percent. And while 3.7 percent "ain't" hot, it's certainly a lot better than many other alternatives. And another reason to continue holding JNJ is its dividend growth.

When you bought JNJ, the dividend was $1.20 a share, and seven years later, it has doubled to $2.44. And in the coming four to six years, considering the passage of the Affordable Health Care Act (I question the word "affordable") it's a reasonable expectation to imagine a JNJ dividend in the neighborhood of $3.50. There are 32 analysts who cover JNJ, and not one of them recommends it be sold. I don't care for your broker's advice.

Now Vanguard's Dividend Appreciation ETF (VIG-$58) yielding 2.1 percent is an oxymoron and a sad excuse for an income investment. The dividend, which has been up and down and up and down, is unattractive, and its niggardly appreciation suggests that VIG's management spent its founding days in a dark room growing mushrooms, not dividends. Even the name is misleading. Heck, my daughter's two English Bulldogs, Winston and Churchill, could pick better stocks wearing bows on their trails. Vanguard has taken poetic license with the word "appreciation," and the "always late for dinner" dunderheads at the SEC should demand its name be changed. Sell this junk! It's not doing what it advertises to do.

And when you sell, VIG call T. Rowe Price and buy their High Yield Tax Free Fund (PRFHX-$11.66) with a 4.55 percent current return. If you are in the 25 percent tax bracket, 4.55 percent is equal to a 6 percent taxable return. And because taxes are certain to rise significantly with the passage of the Affordable Health Care Act, an increased demand for tax-free income should cause municipal bonds to increase in value. PRFHX pays a monthly dividend of .043 cents, and they will send you checks (no cost) that can be used to pay for extrinsic purchases.

And if there's room in your portfolio, consider owning Kinder Morgan, (KMR-$79) yielding 7.8 percent, and Energy Transfer (ETP-$45), yielding 7.9 percent. Both have favorable tax treatment.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

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Published: Fri, Aug 3, 2012