I've spent the last couple of years trying to build a dividend portfolio that will someday provide enough income to support my wife and myself. To carry out that task, I try to concentrate my holdings in quality stocks that have a long history of raising their dividends each year. I rarely sell, I reinvest most of the dividends, and I plan to hold any stock I buy for the long term.
However, David Crosetti recently penned an excellent article titled: Can A Dividend Growth Investor Be A Trader? and it really made me think about my methods. In the article, David talks about his strategy of buying and then selling the more cyclical dividend stocks as they move within a trading range from their lows to their highs. In the meantime, he collects the dividends and monitors his position.
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After reading that article, I decided to leave a comment regarding my gains on a position in Lockheed Martin (LMT):
"I have a position in LMT that is up roughly $20 per share and I'm trying to decide if I should sell and redeploy the proceeds elsewhere. Budget cuts may be ahead and the price may tank. However, the yield is good and another dividend increase may be in the cards. Your article demonstrates one of the tough decisions that DGI investors must face. Sell for the gain or hold for the income."
Fellow Seeking Alpha contributor Robert Allan Schwartz then replied:
"I faced the same problem when McDonald's (MCD) went up. Sell or keep? I chose to sell, because I was able to increase the income from my portfolio by taking the proceeds from selling MCD, and buying other dividend growth companies with a higher yield."
Later, David Crosetti followed up with this response:
"LMT is a company that has been increasing dividends for the last 9 years and is among the best in the defense field. I love this company and the products that they produce. But, over the last 5 years or so, they have had the stock priced in a range that would allow you to enjoy a great dividend and price appreciation at the same time. I think of it as more of a cyclical stock, but it is a good company, regardless.
For me, I would look at how many shares I owned, I would want to do the analysis to see if there are other candidates out there that make more sense, and if I couldn't find a better place to take my money, I might just be inclined to keep it."
Both responses really opened my eyes to two key concepts:
- The idea of trading in and out of some of my cyclical holdings in order to generate capital gains.
- Using those capital gains to increase the income that a portfolio can generate.
With the second concept in mind, I began analyzing some of the other dividend stocks out there and what my income might look like if I redeployed my capital gains into something other than Lockheed Martin, but stuck with the defense sector.
- Current Price: $86.86
- Number of Shares Held: 31.3798
- Current market value of my position: $2,716.70
- Current Yield: 4.61%
- Annual Dividend per Share: $4.00
- Income Generated: $125.52 per year
- Years of Consecutive Dividend Increases: 9
Here are some possible candidates for capital redeployment:
For the sake of transparency, I had to adjust the number of shares to include fractional shares and I also included $8.95 into the cost basis for each position to account for a trade commission.
Boeing Company (BA)
- Current Price: $73.69
- Number of Shares To Buy: 36.7451
- Current Yield: 2.39%
- Annual Dividend per Share: $1.76
- Income Generated: $64.67 per year
- Years of Dividend Increases: 7 out of the last 9 years
General Dynamics (GD)
- Current Price: $65.24
- Number of Shares To Buy: 41.5044
- Current Yield: 3.13%
- Annual Dividend per Share: $2.04
- Income Generated: $84.67 per year
- Years of Consecutive Dividend Increases: 21
- Current Price: $55.88
- Number of Shares To Buy: 48.4565
- Current Yield: 3.58%
- Annual Dividend per Share: $2.00
- Income Generated: $96.91 per year
- Years of Consecutive Dividend Increases: 8
The results are in:
So, was it possible to increase my dividend portfolio's annual income by redeploying capital to another defense stock?
No, not with the three stocks that I checked. Raytheon comes the closest of the three stocks to replacing Lockheed Martin's income.
Is it possible to increase my dividend portfolio's annual income by redeploying capital to a stock in another sector?
Maybe. If I were to analyze stocks from the energy, technology, or industrial sectors, I may find one that yields more income for the same amount of capital.
Is it something that I should do?
In my case, probably not. In a diversified income portfolio such as mine, Lockheed Martin represents a small portion, less than 2 percent, of the total assets. The decrease in portfolio diversification, as well as the possibility of an upcoming dividend increase, makes it look like a break even proposition at best.
Although this exercise has been educational, increasing the income of my portfolio, although super important, cannot be my only consideration in deciding which stocks to own. Factors such as dividend growth rates, company history of dividend increases, dividend payout ratios, current valuation, debt levels, and portfolio diversification should all be considered before selling one position to buy another.
Obviously, this is in no way a comprehensive study of all the possible options. However, understanding these concepts is important for the dividend income investor and as always, positions should be "buy and monitor", not "buy and hold". When you own a stock and it has had a rapid increase in price, it pays to assess the other opportunities out there and evaluate the pros and cons of switching out your positions.
Current Price and Yields are sourced from Finviz.com, and are current as of July 06, 2012. Dividend histories from David Fish's Champions, Contenders, and Challenger's Spreadsheet.