The Most Wonderful Time of Year: Tax Loss Selling Time

At some distant point in the future, as memories of a tumultuous 2020 fade, stock market returns for the year will live on as data points in a long string of annual return data stretching back hundreds of years.

And what a year it was! Despite a hair-raising collapse in equity values in March, during what can only be described as a full-blown panic driven by the COVID pandemic, broad market averages recovered their losses and powered on to one of the most unexpected and violent rallies in recent history. Through December 15, 2020, the S&P 500 Index returned 16.4% for the year while the Nasdaq-100 Index delivered a scalding 45.5% gain.

Notwithstanding the double-digit returns in the broader large cap indexes, other segments of the stock market exhibited greater vulnerability to the economic forces unleashed by the pandemic. Even among large cap stocks, there were pockets of weakness, including the dividend paying stocks that many investors rely on to deliver regular income.

The S&P Dividend Aristocrats Index, which tracks S&P 500 Index constituents that have increased their dividends for at least 25 consecutive years, lagged the broader large cap indexes, returning 8.2% for the year-to-date period through December 15, 2020. The positive performance of this basket of dividend stocks belied weakness in several well-known stocks, many of which investors hold as individual securities in their portfolios. Below is a list of the 10 worst performing stocks in the S&P Dividend Aristocrats Index in 2020 that investors may wish to consider selling before year-end to offset taxable gains in other portions of their portfolios.

Some lessons come to mind for income investors seeking to learn from the carnage in these well-known names in 2020:

• Don’t Go Chasing Yield. While many investors, including many retirees, wish to generate income to fund their lifestyle needs, the income a security or portfolio can provide is ultimately determined by its total return, not its dividend or coupon. Collecting a hefty dividend does no good if the underlying security or portfolio loses 20% or more of its value.
• Concentration Risk Can Kill. Despite the growing popularity of pooled investment funds and especially ETFs, many investors continue to invest in individual securities. Meanwhile, the rapid growth of online trading platforms like Robinhood has introduced a new generation of investors to the thrills of trading individual stocks. But these thrills come with heightened idiosyncratic risk that diversified portfolios can mitigate.
• Returns Should Be Considered in the Context of Risk. While the S&P 500 Dividend Aristocrats Index provides income investors some degree of diversification in the narrow category of dividend-paying stocks, maximizing risk-adjusted returns — or the amount of return you earn relative to the volatility of your portfolio — requires investing in diversified portfolios that provide exposure to the full panoply of income-producing securities. The table below compares the year-to-date performance through December 15, 2020 of the S&P 500 Dividend Aristocrats Index to the Nasdaq 7HANDL Index, which provides exposure to a wide range of ETFs that invest in various types of income strategies, including stocks, bonds and alternatives. The Nasdaq 7HANDL Index outperformed the S&P 500 Dividend Aristocrats Index during the period with less than half the volatility.

This article is original content written by Matt Patterson for Catalyst Insights.

[1] The Sharpe ratio is a measure of risk-adjusted returns that describes how much return is generated in excess of the risk-free rate (typically the three-month U.S. Treasury Bill) per unit of volatility (standard deviation).