- You never lose by taking a profit.
- Retirees can "lock in" distributions now.
- Sell half your stake in NGG, ARLP, OHI, MO.
- Take advantage of the timing of the market.
This is the second of my articles that is meant to offer a somewhat contrarian view to the one-size-fits-all DGI theory. In my first article, "Forget About SWANs, Fish And Chowder: Chase Yield In Retirement", I suggested that hi-yield slow growers and hi-yield fixed rate are valid alternatives for retirees. Now I am saying if you are very close to or just starting retirement, you may want to stray from the DGI hold forever strategy.
Certainly, anyone who has use DG for the past 10-50 years is happy today. Depending on your age, if you are approaching or are in retirement, you have seen your self-directed nest egg grow to an unprecedented sum, and your ever-increasing dividends means that you are set for a secure retirement. If you are involved for the last 1-5 years, you are amazed at how easy this is, as your portfolio grows in value and dividends increase every year. Probably just about every one of your holdings is at or near its 52-week or all-time high. When you run your screens, no matter whether it is 1, 5, 10, 25 or 50 years, DGI far outpaces every other plan. Of course, if you ran this test in March of 2000, after the Nasdaq had just doubled in 1999, and in 3 months up another 10%, you might have found that Tech was the way to go. Or in 2006, you might have seen that real estate in Las Vegas or Naples FL was the best. Of course, no matter what, DGI was still successful, but timing still counts for something.
So here is my premise, based upon my own situation. First of all, I am not a 100% DGI. I also own hi-yield low dividend growers and Preferred stock that pays me a 6%-8% fixed return. As a result, the yield on my portfolio is about 7%. 2015 will be the first year I begin the "withdrawal" stage. However, no matter what your portfolio mix, I am sure you are sitting on some big profits due to the increase in prices the last couple of years. For example, some of my holdings that may also be on your lists are National Grid (NYSE:NGG), Altria (NYSE:MO), Omega Health Care Investors (NYSE:OHI) and Alliance Resource Partners LP (NASDAQ:ARLP). If you have been holding these dividend growers for the last few years and reinvested the dividends, your value for each may have doubled by now. If you are years away from retirement or already well into retirement and those are in your DG portfolio, you have made some excellent decisions, and keep on going with no change. But if you are a year or two away, or like me just a few months from withdrawing, then consider some profit-taking. Ok DG investors, take a breath, I know selling and keeping cash go against the theory (as someone posted today, "killing the goose that laid the golden egg"). But look at this scenario.
I started 2014 with about $1 million in my portfolio, at 7% projected for the year in dividends ($70,000). My plan for 2015 and 2016 was to withdraw about $50,000 and reinvest the rest - about $20,000. (I also don't believe in automatic inflation increases. Who knows I may need less in 2016 when my car is paid off). By mid-June, and after the great 2013, with dividends and price increases, my value had increased to over $1.1 million in IRA and taxable accounts. I sold off parts of those listed above to equal $100,000. I "locked in" those profits by selling. I am in the 15% bracket, so no tax is due. My portfolio is back to the $1 million I started with, and with some changes, my dividend projection for the next year is still about the same, maybe a few thousand less. So what have I accomplished? I now have enough cash to cover my withdrawals for the next two years. That's a SWAN for me. Plus in 2015 and 2016, I will not be withdrawing, so I can reinvest the entire $70,000 income produced. Also, since my portfolio has some higher-risk holdings that DGI don't have, I have the 2-year cushion to absorb any disasters and not make any hasty decisions.
Conclusion: There are a lot of profits sitting in DG investors portfolios. If you are getting ready to spend in the next two years, taking those profits off the table now is a good idea. You may not have this opportunity in 2015. This is NOT market timing, but taking advantage of this time in the market when everything is at an all-time high value.