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When I wrote Part 1 of this two part article, I didn't know that this month's activities would end up extending to two parts. But then again, we never really know what the future will hold, do we?

Back in early August, I mentioned that I was hoping to increase the number of positions in my IRA from 30 to 31, but that cash was a bit tight at the moment. However, thanks to the market maintaining its recent levels, and a couple of stocks in particular, I decided to do what I did at the beginning of the month and reap a small amount of profits, this time in order to initiate a small position in a new company.

Cashing In

In particular, two companies caught my eye as having had healthy gains over their cost basis, and having over or close to a 4% allocation in my portfolio. As those of you who have been reading my articles will recall, I had 30 positions in my IRA, which means that the "parity" percent allocation target of any one position was 3.33%. The idea here is to keep all positions close to parity so that no one stock will drag the entire portfolio down should something untoward happen to that company, or that company's sector. Ultimately I would like to have 50 positions in my IRA so that the parity target would be just a 2% allocation for any one position.

There is some natural fluctuation in each position's percent allocation due to shifting share prices, but overall the tide raises (or lowers) all boats in the harbor, so these allocations tend to stay where they are relative to each other.

Sometimes, however, a stock will really take off, and there will be a substantial paper profit (substantial for me, that is) in my spreadsheet. If that company's percent allocation is also well above the current parity target, and its price appears to have stabilized somewhat, I will consider selling a very small portion of that stock and booking those profits. This isn't a hard and fast, automatic rule, but something I keep in mind given current conditions and my near-term goals.

Such was the case with Microsoft Corporation (NASDAQ:MSFT). I had actually intended to sell some Microsoft around mid-July, when it suddenly took an unexpected (to me) dive in its price. Then, when it was announced that Steve Ballmer would be stepping down as CEO sometime in the next 12 months, the price jumped up again in response, and I decided the time was ripe to harvest 9.68% of my shares and take a bit of profit to use towards my goal of picking up a 31st position.

(click to enlarge)

(All charts courtesy of Interactive Brokers, LLC)

MSFT had gained 26.6% in my portfolio and held a 4.22% allocation position prior to me selling a small bit of it. Afterwards, it still held a 3.54% allocation in my portfolio, which is comfortably above the 3.33% parity of 30 positions that I had then.

Another position that I had been keeping my eye on and wondering whether I should trim off some profits from was Walgreen Company (NYSE:WAG). I was very pleased with the performance of WAG since I bought my first batch 11 months ago, and in that time it had realized a 33.1% gain in value, and represented a 3.83% allocation of the portfolio's total. I had to think long and hard about selling off some WAG, but after consulting its chart and looking at what I was intending to use the funds for, I decided that it would be worthwhile to book some profits from WAG as well.

(click to enlarge)

WAG appeared to have stabilized in its recent price range, so I was OK with pulling the trigger. After the sale it still held a 3.48% allocation in my portfolio, putting it in safe territory.

So now I had about the same amount of cash from the sale of MSFT and WAG as I'd accumulated during the month from dividends, plus what was left over from my last round of selling for profit in early August, and that gave me a healthy amount with which to initiate a new position and grow my portfolio to 31 stocks held.

Where It All Went

One of the criteria that I used to determine whether or not to sell anything at all in order to fund the purchase of a new position was to look at how much I would "lose" in annual dividends from what I sold versus how much I would gain in potential annual dividends by using those liberated funds to purchase what I had my eye on.

One stock that I'd been monitoring since October of last year was Omega Healthcare Investments (NYSE:OHI). With the appropriate numbers plugged into my trusty spreadsheet, I determined that what I had gained in dividends with the early August sales-and-purchases (see Part 1), combined with what I would gain in dividends by buying OHI if I were to sell MSFT and WAG, would result in an increase to the potential dividends that my portfolio would earn on an annual basis by 159.23% over what I'd sold. That would be a very nice boost to my portfolio's total yield, and was a strong motivating factor to sell off a small bit of MSFT and WAG in exchange for picking up something as productive as 6.47% yielding OHI.

Of course, I was using the My Mad Method [MyMM] spreadsheet to work out what next to buy, and OHI was on that list, so I needed to see how it ended up being ranked before I made any final decisions. Here is the watch list that I used, where I weighted Yield and 5 Year Dividend CAGR by 30%, as compared to the baseline 6.25% normalized weighting that the other 14 metrics in my version of MyMM received; the list is ordered by the final Weighted MyMM Rank:

Orig

Weighted

  

Delta

  

MyMM

MyMM

MyMM

  

Ratio

Recent

 

Rank

Avg

Rank

Company

Ticker

Reading

Yield

CDR

1

5.59

1

Textainer Group Holdings Limited

(NYSE:TGH)

Stable

5.33%

23.0%

1

7.82

2

Chevron Corp

(NYSE:CVX)

Too High

3.36%

12.6%

9

7.85

3

Omega Healthcare Investors, Inc.

OHI

Falling

6.47%

15.9%

3

7.88

4

ExxonMobil Corp

(NYSE:XOM)

Buy!

2.88%

12.6%

4

8.04

5

Procter & Gamble Company

(NYSE:PG)

Too High

3.03%

13.2%

8

8.24

6

Cracker Barrel Old Country

(NASDAQ:CBRL)

Screaming!

2.98%

21.5%

5

8.32

7

Reynolds American, Inc.

(NYSE:RAI)

Too High

5.22%

13.0%

6

8.60

8

Colgate-Palmolive

(NYSE:CL)

Too High

2.31%

14.1%

7

9.55

9

PepsiCo, Inc.

(NYSE:PEP)

Too High

2.85%

12.2%

10

9.59

10

Southern Company

(NYSE:SO)

Holy Cow!

4.81%

8.8%

TGH was #1 by a long shot in the resulting list, with a very impressive Chowder Dividend Rule [CDR] number. This should come as little surprise, given that I had essentially weighted the CDR by 30%, which helped draw TGH to the top. International shipper TGH could represent an interesting diversification position for my portfolio, but at the moment I'm a little leery of the stability of the company. Looking into the individual MyMM metrics, one metric that really alarmed me was TTM Cash Margin, which was -335% based on the most recent earnings numbers I had for the company. That's a big red flag, as this metric gives an indication of a company's ability to be able to continue paying out its dividend in the future. With such a low number, I decided to pass on TGH this time; or should I say, again.

CVX came in #2, but was only 3/100ths of a point ahead of OHI in terms of its Weighted MyMM Average number, putting it in a virtual dead heat with OHI. With a Delta Ratio Reading of "Too High" and a yield that was almost half of OHI's, CVX got put on the back burner, but I'm definitely keeping an eye on it, along with close #4 XOM.

OHI came in at #3, as mentioned. This equity REIT had gained a ton in value in the 10 months since I'd started watching it, but had taken a bit of a dive of late, along with the rest of the REITs in the marketplace. That piqued my interest quite a bit, as I had really regretted not picking it up back when I first added it to my watch list.

(click to enlarge)

As indicated by the Delta Ratio Reading, OHI's price was "Falling", and while not as solid as a "Buy!", I decided it was time to finally add this Dividend Contender to my portfolio.

Wrap Up

So that's how things unfolded here at the end of August, 2013: I decided to sell a smidgen of MSFT and WAG to add to the cash I had left over from my previous sales from earlier in the month, plus a nice collection of dividends since then, and pick up a 1.75% allocation of OHI to break the 30 mark and bring the number of positions in my portfolio up to 31. This didn't tweak the parity target very far, as it went from 3.33% at 30 positions to just 3.23% at 31 positions, but the important factor was to get my hands on some OHI at a time when the price had come down from the climbing highs I'd seen earlier in the year. In the process I booked some profits and nudged the total yield of my portfolio upwards a bit, which, in the end, helps meet the ultimate goal of this Dividend Growth Investor.

Here's a run down of what I current hold in my IRA, ordered by the stocks' tickers:

Orig

Gain

Prjctd

    

MyMM

Loss

Divs

Comb

   

Rank

Rank

Rank

Rank

Company

Ticker

CDR #

5

6

26

7

AFLAC, Inc.

(NYSE:AFL)

13.32%

3

31

1

3

American Capital Agency

(NASDAQ:AGNC)

18.61%

4

21

20

15

BHP Billiton plc

(NYSE:BBL)

22.93%

12

12

15

8

ConocoPhillips

(NYSE:COP)

17.23%

8

27

9

13

Crescent Point Energy Corp

(CSCTF.PK)

15.00%

29

13

10

19

Freehold Royalties, Ltd.

(OTCPK:FRHLF)

3.12%

10

8

27

15

General Dynamics Corp

(NYSE:GD)

15.40%

23

9

19

18

Hasbro, Inc.

(NASDAQ:HAS)

21.61%

13

11

30

22

Harris Corporation

(NYSE:HRS)

24.71%

8

3

21

1

Johnson & Johnson

(NYSE:JNJ)

11.25%

27

4

22

21

Kimberly Clark Corp

(NYSE:KMB)

10.50%

16

22

24

29

The Coca-Cola Company

(NYSE:KO)

11.32%

26

1

18

15

Lockheed Martin Corporation

(NYSE:LMT)

25.93%

5

17

13

3

Lorillard, Inc.

(NYSE:LO)

22.23%

15

16

12

12

Main Street Capital Corp

(NYSE:MAIN)

6.39%

2

10

23

3

Microsoft Corporation

MSFT

17.89%

22

19

11

19

National Grid, plc

(NYSE:NGG)

17.08%

1

30

3

2

Annaly Capital Mgmt

(NYSE:NLY)

42.11%

19

28

7

22

National Presto Industries

(NYSE:NPK)

25.54%

17

15

8

9

New York Community Bancorp, Inc.

(NYSE:NYCB)

6.68%

28

23

31

31

Omega Healthcare Investors, Inc.

OHI

15.98%

14

26

28

30

Philip Morris International

(NYSE:PM)

16.90%

18

24

2

13

Prospect Capital Corporation

(NASDAQ:PSEC)

9.90%

25

25

6

25

Resource Capital Corp

(NYSE:RSO)

35.70%

30

2

4

6

SeaDrill, Ltd.

(NYSE:SDRL)

7.74%

31

14

16

28

AT&T

(NYSE:T)

9.76%

7

29

5

10

Two Harbors Investment Corporation

(NYSE:TWO)

13.19%

20

7

29

25

Universal Insurance Holdings, Inc.

(NYSE:UVE)

12.25%

21

20

14

24

Vodafone Group, plc

(NASDAQ:VOD)

14.65%

11

5

25

10

Walgreen Company

 

26.38%

24

18

17

27

Wisconsin Energy Corporation

(NYSE:WEC)

22.84%

  • Current Yield of Portfolio: 6.51%
  • Current S&P 500 Yield: 1.93%
  • YTD Portfolio Gains (without contributions): 15.45%
  • YTD S&P 500 Gains: 15.11%
  • Projected YE Gain in Annual Dividends over YE 2012: 15.36%

As always, thanks for taking the time to read this, and please feel free to comment below.

Source: What Next To Buy, Taking Profits, And Why - Part 2

Additional disclosure: Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.