Seeking Alpha
Value, dividend investing, growth at reasonable price, portfolio strategy
Profile| Send Message|
( followers)

My mother was one heck of a Black Jack player. She played the game her entire life and while the cards could run hot or cold, she always came out a winner. Hard to believe, I know, but it all depends on how you define "winner."

Now I'm not saying that she won every Black Jack hand that was dealt to her. On the contrary. She won and lost hands, pretty much in keeping with the odds of the game. Now, she knew the "rules" very well and back in the days when you were playing the dealer with one deck, she had developed the ability to "count cards."

But again, that's not why she was a winner at Black Jack. All that did was make her a better player than most people. Where she excelled and was a winner was in her natural talent for managing her money at the table. She had a strategy and she never lost sight of using "house money" to keep herself in the game.

In one of my recent articles, "Dividend Investing and Payback: Why it Pays to Watch Closely," I explored the idea of looking at how long it would take a dividend growth stock to return 100% of an investor's original purchase by increasing dividends every year.

In that article, I also mentioned a transaction that I made with my purchase of Exxon Mobil (NYSE:XOM) late last year. Here is what I said:

Last year I purchased a position in XOM at $61.15 a share. I purchased 500 shares for a cost of $30,500. The shares were purchased on September 9, 2010. In April of 2011, I sold 350 shares at $87.50 and received $30,600 (my original stake in XOM) and kept 150 shares. That is worth $11,500 at today’s price and my yield on cost is my original 3%. I got my “payback” in 7 months.

It was this portion of the article that seemed to garner the most discussion. As dividend growth investors, we normally do not sell very often. Instead we will hold a stock until either the fundamentals lead us to believe that the company has developed serious issues or the dividend has been reduced or cut. So, I was surprised by the amount of discussion that my trade produced and just recently, I received an e-mail from an SA friend and fellow author, Robert Allan Schwartz, that brought the article back into focus. I've asked Robert if I could share our e-mail conversations and I have received his permission to do so.

Here's what the initial message said:

Hi Dave,

May I ask your opinion? I saw what you wrote about selling XOM. I think I've just done something similar, but I want to check it out with you to make sure I understand it properly.

I owned 770 shares of MCD at $75/share. My YOC was 3.733%. I sold 168 shares yesterday, at $94/share. My remaining shares have an average price of $69.60. My YOC on my remaining shares is 4.023%. I now have $15,000 to invest somewhere else.

I'm blown away that SELLING some shares caused my YOC to go UP. :-) Plus, I now have more cash to invest. And, as long as I invest that cash in a company whose current yield is >= 4.023%, I'm raising the overall YOC of my portfolio. Do I understand properly?

If so, then THANK YOU for writing that comment, because this deal never would have occurred to me on my own. :-(

OK. I've looked at this a couple of times now and while I'm still a little confused by all the numbers, here's what I "think" and what I "know." This is how I replied to Robert:

While mathematically, it would appear that you have lowered your cost basis for the remaining shares of MCD, I am not sure that you have. You paid $75 a share for your stock. That is indisputable. So, you paid $57,750 dollars for your initial position of 770 shares. The only way that your cost basis would change (excluding reinvested dividends) is if you were to add more shares at a price that would be higher or lower than the initial $75 per share.

You sold 168 shares for $94 each. That's $15,792 dollars. When you subtract $57,750 from $15,792, you are left with $41,958. You still own 602 shares. When you divide the $41,958 by 602 shares, it would appear to be $69.69 per share cost. But, again, the fact remains that they were bought at $75 per share cash money and the sales transaction does not change the cost basis. By the same token, then, neither did your dividend yield on cost.

Here's what I "know." Let me use an analogy, if you don't mind. You are playing Black Jack. You started out with $57,750. After a while, you have chips in front of you that add up to $72,380 (770 shares at $94) You are $15,792 to the good! You now have two options as I see it.

Option 1: (mine for XOM)

Take the starting funds of $57,750 off the table and give that to the wife to hold for you. Continue to play with the $15,792 of winnings (house money) that is sitting in front of you. This is a "winner-winner, chicken dinner" situation. For all intents, your wife is back in the room with your initial stake of $57,750 which you will have available to redeploy however you see fit, moving forward.

Option 2: (yours for the MCD)

Your starting funds of $57,750 have grown by $15,792 You take the $15,792 and give it to the wife to hold for you. Now you are still in the game with the original $57,750 and your wife is back in the room with your $15,792 profit, which you will be able to redeploy however you see fit. Again, it's a "winner-winner, chicken dinner," situation.

Both options are good ones. A little different from one another, but equally sound decisions. When you initially invested $57,750 in MCD, you put 100% of your capital at risk. Just like at the black jack table. How it plays out is how it plays out.

Conclusion:

Managing your winnings is the critical part of being a successful Black Jack player. There are many people who can count cards, but very few who can actually walk away a winner--because they have poor money management skills.

As a dividend growth investor, I am always looking to grow my income stream. However, there often comes a time when you have to address your situation honestly and ask the question, "Is what I am currently doing the best use of my money, right now?" Sometimes, even though we are inclined to "stay the course" there may just be a better way to go.

Hope that clarifies things a bit.

Disclosure: I am long XOM, MCD.

Source: Dividend Investing And Black Jack: How Strategic Money Management Can Make You A Winner