1. Avoid the Fiscal Cliff (Even if Washington Doesn’t)

2. Plan for the Fiscal Cliff What it is, and how likely are we to go over it? What it means for dividend investors What it means for the markets Some fiscal cliff tax strategies Hedging investments against the fiscal cliff Fiscal cliff-proof stocks for your portfolio

3. What is the Fiscal Cliff? George W. Bush cut taxes in 2001 and 2003 Cuts limited to 10 years, expire 12/31/12 Deals in 2011 added spending cuts and end of 2% temporary cut in social security contributions If no agreement is reached, all income taxes go up on 1/1/13 Estate tax goes up to 55% on estates over $1m Dividends become fully taxable, capital gains tax 20% Could do a revenue-neutral deal afterwards on estates, dividends, deductions Eliminates 77% of 2013 to 2022 budget deficit – (cuts the 2013 to 2022 deficit from $10 trillion to $2.3 trillion)

4. Will they avoid the fiscal cliff? Obama wants $1.6 trillion in tax increases, few cuts GOP Speaker Boehner offers $800 billion in tax increases, no hikes in tax rates, just cut deductions Not much goodwill, far apart Any likely deal will lose most of the revenue increases and spending cuts from the “cliff” Result $1 trillion deficits every year till 2017 – Not certain US credit rating will stand that Personally I prefer the cliff, even with tax increase – Need middle class tax increases to overcome deficit – Good for voters to pay for big government they vote for But I think it’s 70% likely they will do a deal (possibly early in the New Year) and we’ll continue big deficits

5. Effect on dividend investors Dividend tax will rise from 15% to 39% for top rate taxpayers – But middle income taxpayers will pay 15% or 28% – Institutions will pay corporate tax rate or nothing Total corporate plus investor tax will be close to 70% Managements will likely cut dividends, conduct stock buybacks (yuck!) BUT: REITs and MLPs don’t pay corporate tax, so won’t cut dividends And funds paying dividends out of capital won’t attract dividend tax – May pay some capital gains tax, at 20% (today 15%) Price effect on dividend stocks will thus be modest, beyond general market effect Dividend tax hike may be temporary; double taxation very unfair – Personally I’d make dividends tax deductible for corporations Eliminate most corporate tax games

6. Cliff effects on the markets Three effects on markets, in ascending order: 1.Dividends fully taxable, so prices may drop – But bond interest already taxable, with yields very low 2.Higher taxes, lower spending cause mild recession, knock stocks – Probably immediate lurch, but little long-term effect 3.$500 to $700 billion lower deficit will cause bond boom – 10-year Treasury yields below 1% – Also super-strong dollar, as payments deficit and drain on U.S. capital falls sharply

7. Some Fiscal Cliff tax strategies First choice: Put dividend payers in an IRA or 401(K) – You can put it in regular IRA, convert to Roth immediately Do every Roth IRA conversion you can in 2012 – It bulks up your savings at 2012 tax rates Lose tax deduction going in, but tax free coming out – Next year’s ordinary IRA contribution cuts your taxable income May “de-rich” you (reduce taxable income below $250K) Second choice: Dividends that aren’t dividends – Funds that pay returns mostly out of capital Third choice: Sell call options to increase income – Taxed at capital gains rates (part short, part long.) Fourth choice: Dividends from REITs, MLPs, and business development companies – Must pay out 90% of income in dividends, pay no corporate tax – Some dividends may be partly capital, in any case only pay tax once Remember: if income moderate, dividends only 15%/28% tax

8. Hedging Against the Fiscal Cliff Stock index put options (market will drop initially) – We have S&P Dec 2013 650 puts and Dec 2014 700 puts Gold and commodities (cliff-driven recession will make Bernanke print more money) – We have Play-Money Portfolio and GLD Jan 2014 $240 calls Treasury futures (TLT) calls – Alas, we have puts, Jan 2014 $85 puts – Good speculative position would be TLT Jan 2014 $135 calls (currently $2.90 offered) – Don’t hold them too long; inflation’s coming and will cause bond market reversal – We will hold our puts. Remember, there’s only a 30% chance of going over the fiscal cliff

9. Fiscal Cliff-proof Dividend Stocks We have two that are ideal: – Aberdeen Chile Fund (NYSE:CH) – Aberdeen Australia Equity Fund (NYSE:IAF) These pay 10% of net asset value/year – But they’re mostly not technically dividends Either capital gains or return on capital – Hence remain low-taxed – Both funds are in commodity economies outside the U.S. – Both will benefit from commodity inflation and global growth We sold two call options to generate capital-gains-taxed return, on Navios Maritime Holdings Inc. (NYSE:NM) and Old Republic International Corp. (NYSE:ORI). Also have several holdings that don’t pay corporate tax: Breitburn Energy Partners LP (NasdaqGS:BBEP) Old Republic International Corp. (NYSE:ORI) – Huge tax losses, won’t pay tax for years Navios Maritime Holdings Inc. (NYSE:NM) – Domiciled in tax haven, big capital gain potential Vanguard Natural Resources LLC (NYSE:VNR) Prospect Capital Corp.(NasdaqGS:PSEC) – Not all its dividends are taxed as dividends, some are return of capital and capital gains

10. Conclusion Fiscal cliff is moderate-probability event Economically welcome in the medium term Can minimize tax impact Can buy hedging investments to profit from it Stock choice can limit effect on dividend stock portfolio Good Investing!