TAKING STOCK: Stock recommendations

Dear Mr. Berko:

We are in our mid-70s. And on your recommendation, we bought 500 shares of SunTrust 7.87 percent preferred stock in 2009 at $17.20 . It gave us $980 or 11.5 percent in dividend income, and now that preferred stock has been called at $25. So we have $12,500 that would be nice to reinvest and replace as much of the $980 in income as we can. We don't mind taking a gamble with several of the high-yielding issues you recommended, but our broker said Linn Energy, Vanguard Natural Resources and Energy Transfer Partners are too "dangerous." So he recommended that we invest in Washington Mutual Investors. He showed us that the fund was up 19 percent in 2009, over 13 percent in 2010 and up 7.85 percent for 2011, and so far this year it is up 7.65 percent. He says we can withdraw $250 each quarter, which is 8 percent annually, and get $1,000 a year, and we would have the extra money we'd like. He recommends this because Washington Mutual, which is one of the oldest funds in America, earns more each year than the amount of money we want to take out. Please tell us what you think.

SA in Chicago, Ill.

Dear SA:

I'm having trouble deciding whether you should be Baker Acted for listening to that cutpurse, if he should be Baker Acted for lying to you or if both of you ought to be Baker Acted in the same cell for stupidity and cupidity. Washington Mutual Investors (AWSHX-$30.38) is one of the oldest, finest and universally respected mutual funds south of 42 degrees North Latitude, a very popular Chicago bar. However, its performance during the last 10 years really "sphinx," and its future performance during the next 10 years is likely to place you in an uncomfortable position relative to the 8-Ball.

AWSHX's load adjusted return for 2011 (after adjusting for a huge 5.75 percent commission, was minus 3.1 percent and certainly did not earn sufficient capital gains and dividends to cover your needed 8 percent withdrawal. Washington Mutual had a three-year commission adjusted return of 14.31 percent, a negative 1.20 percent five-year return and a 4.28 percent 10-year return, certainly not enough to support a decade of withdrawals at $1,000 a year.

Candidly, there are very few mutual funds that will allow you to take 8 percent withdrawals without sucking away a chunk of principal. Heck, even a long-term CD from Bank of America would have done better than AWSHX and any other mutual funds. Those numbers are certainly not good enough to support an 8 percent annual withdrawal without serious danger to your principal. Each year, that ASSHX fails to earn 8 percent. Plus, its annual management fees, the negative difference between your withdrawal and the fund's earnings erase your principal. And if the market remains flat to plus 4 percent to 5 percent over the next decade, as many believe it will, you guys will run out of money with an 8 percent annual withdrawal.

We are in a vastly different market environment today, and investors' future successes are not dependent on the metrics of the past. In too many instances, the investment rules have changed during the past 10 to 20 years. The investment tools have changed too, and unfortunately, there are too few money managers who know how to be successful in this milieu.

But that broker is right as ninepins. Linn Energy (LINE-$39), yielding 7.4 percent, Vanguard Natural Resources (VNR-$28.15), yielding 8.5% and Energy Transfer Partners (ETP-$45) at 8 percent may be modestly speculative but not as much so as an 8 percent annual withdrawal from Washington Mutual Investors. Those three issues deserve a shot, though your brokster will be disappointed to miss out on a $700 commission if you buy $12,500 Washington Mutual. Meanwhile, you should know that the distributions form LINE, VNR and ETP are virtually non-taxable.

So move your account from that Big Box Brokerage that soaks you with a $350 commission to purchase those three issues, and visit one of the well-known discounters where your total costs will be less than $30.

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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.

© 2012 Creators Syndicate Inc.

Published: Wed, Aug 8, 2012

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