Sometimes the world changes, we notice, and take action in your portfolios. An attractive opportunity may arise, or some issue may develop with a holding we already own. This is the story of a problem that developed, and how we handled it.

For several years we had owned shares in a certain class of telephone companies. Smaller landline carriers, generally serving less-populous areas, offered very high dividend yields. We believed there was a gap between perception and reality from which we could profit.

You see, everyone knew that landlines were in decline as consumers switched to cell phones only. This trend was particularly pronounced among younger households. But we knew that consumer landlines were a small part of the revenues of these companies. Most of the business came from data lines for businesses and high-speed internet access for consumers.

We were happy to own the shares and collect the dividends, believing that growth in the growing parts of the companies might offset shrinkage in the shrinking parts.

An amazing thing happened in 2016. For the first time ever, the number of homes connected by wire to the internet declined. People began to rely more on their smart phones and pad-type devices to connect. Some no longer needed or wanted a computer connected to the internet anymore. This was not what we expected.

We realized the ramifications for our holdings: the part of the business that was supposed to be growing was now shrinking! If revenues declined, dividend cuts would not be far behind. There seemed to be no chance for these companies to preserve value for shareowners.

Fortunately we had been cutting back these holdings for some time to make room for opportunities in high yield bonds. But we concluded that we had better divest the rest. We got rid of the rest of the holdings in all discretionary accounts in a single day of trading.

As we reviewed market sectors recently, we could not help but notice that the two former main telephone holdings were down year to date by more than 35%. Thank goodness we sold out.

Clients, nobody is perfect. The markets have a way of humbling everyone. We do think we improve our chances with wide-ranging research, study and thought. If you would like to discuss these ideas or any other pertinent topic, please email us or call.

---

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.