What Next To Buy, Taking Profits And Why

by: J.D. Welch

It seems like more time slips away between the articles that I write about My Mad Method [MyMM] and how I use it to manage my burgeoning dividend growth portfolio every month. Well, to be frank, it's been a very good year for vacations for the Welch Family, but as a result that hasn't left too much in the budget to add to either mine or my wife's IRA. At least not in the last few months. So I've been left to wait until I have enough dividends accumulated to make a reasonable and substantial purchase of anything, and thus be able to report about it to you, dear readers.

However, like a lot of you I'm sure, I've been watching the market as it kept climbing and climbing, way past the point of "Sell In May And Go Away". So much so, that a number of my holdings had blossomed to the point where they looked ripe for a small pruning to bring them back in line with the rest of my holdings and restore balance to my portfolio.

If you've read any of my articles in the last year or so, you'll probably recognize the term "parity" that I like to use when I refer to individual stocks in my portfolio. I like to keep all of the positions in my IRA as close to the same percentage allocation of the total value of my portfolio as possible. In this way, if anything untoward happens to any one company, my portfolio won't take too much of a hit in value from a single (or a few) tanking stock(s).

Currently I hold 30 stocks in my IRA's portfolio, which means that the ideal percentage allocation number for any given stock is 3.33%, which is a nice number to be working with. As I've watched the market grow and grow, I've also seen most of my holdings grow with it. The notable exceptions are the three mREITs that I hold, American Capital Agency (NASDAQ:AGNC), Annaly Capital Management (NYSE:NLY) and Two Harbors Investment Corporation (NYSE:TWO). These poor fellows have taken quite a beating in terms of their prices since recent actions announced and/or taken by the Fed, but despite a bit of trimming to their dividends, their yields are still high enough for me to keep holding onto them and collecting those dividends, at least for the foreseeable future.

But that's not the point of this article. The mREITs have been one of the obvious losers in the recent market, but there have been a lot of winners, too. As I examined my MyMM spreadsheet and the various worksheets that I have on it to track important information about my portfolio, it came to my attention that a number of my holdings had grown to the point where 1) they had realized a substantial gain, and 2) they were well above my current parity level of 3.33%.

In the meantime, there were a few positions that were well below parity, and which I wanted very much to bring up to or over parity if I could. After many weeks of watching and waiting, I decided to act late last week, and pare back a few winners (just a bit) in order to harvest some funds with which to bring some other gems up closer to, or hopefully over, parity.

Taking Profits

Now, some folks will say, "If a stock's price is steadily rising, why not let a runner run?" There's something to be said for this; however, my counter argument has always been, "It's never a bad idea to take profits", especially when the gains are substantial and I can keep that position above parity if I take those profits. And, if in the process I can use those liberated funds to invest in more shares of a proven winner the price of which has been beaten down a bit, well, that seems like a win-win to me.

So here are the three stocks from my portfolio that were among those that had the highest gains and were well above parity:


















General Dynamics Corp





And here's a look at how these stocks had been performing up to the point where I sold a bit of each of them off:

(All graphs courtesy of Interactive Brokers LLC.)


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General Dynamics Corp.

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There were a couple of other of my stocks that had actually realized better gains than these three, specifically Johnson & Johnson (NYSE:JNJ), with a 40.3% gain, and Walgreen Company (WAG), with a 38.7% gain, but their parity numbers were below 4.00%, and I had trimmed some from then in an earlier round of profit-taking, so I didn't feel like going back to them for more; I like where I am with both of them.

Let's Go Shopping!

So now, in addition to the tidy sum of dividends that had accumulated since I last reported what I was doing in my IRA, I had a goodly amount of money that needed to be spread across as many positions as needed it, and that I could do so to effectively bring them up to or just above parity. Turning to the worksheet on my MyMM spreadsheet where I had all of the positions that were below parity, the following were the Top 5 in terms of a Weighted MyMM Rank:




















BHP Billiton plc








Philip Morris International








Two Harbors Investment Corporation







Universal Insurance Holdings, Inc.








Vodafone Group, plc





As I've been doing for the past few months, I weighted all of the positions that were below parity in the following way:

  • Yield - 30%
  • 5 Year Dividend CAGR - 30%
  • Percent Allocation - 50%

By using the Yield and 5 Year Dividend CAGR metrics, I effectively am weighting the stocks on this list by the Chowder Dividend Rule [CDR], and a 50% weight to Percent Allocation gives those positions that are furthest away from parity a much better Rank.

As you can see from the table above, Philip Morris International was the furthest away from parity of all of my holdings, and I really wanted to bring it up to parity, which was part of my motivation to take profits from the others I mentioned above. A Delta Ratio Reading of "Stable" meant that its current price was very close to the average of its 52 week high and low prices; in fact, it was very close to the price I'd recorded back on June 24th when I started focusing in on trying to bring as many positions up to parity as possible.

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That meant that PM was a shoe-in for getting the first available set of funds. So with a little bit less than half of the funds I now had at my disposal, I increased my existing position in PM by adding an additional 44.1% more shares, bringing the percent allocation of this dividend stalwart to 3.39%. Mission accomplished.

But that left quite a bit of cash to go somewhere else that needed it. Looking at the table above, it might seem that with the #1 Weighted MyMM Rank and the second lowest percent allocation the obvious choice was TWO. But as I discussed earlier, mREITs aren't doing too well at the moment, and while in some cases TWO might present an opportunity to do some bargain shopping, I didn't feel comfortable pumping more cash into what could be a sinking ship. At least, not at this time.

At the #3 Rank was BBL, with a very nice CDR number, too. However, BBL was pretty close to parity already at a 2.91% allocation, and it had been "on the mend" recently compared to how it had fared earlier in the year. So I kept looking.

Next up were UVE and VOD, with nearly identical percent allocation numbers. But while VOD had a better yield at 6.80% (compared to UVE's respectable yield of 4.07%), I had recently heard that the company had decided to freeze its dividend. Add to that that it only pays dividends twice a year, and the ex-dividend date for the larger payout was well behind us, and I was a bit skeptical of putting much more into this international telecom giant, at least until I heard better news about its dividend.

UVE, on the other hand, is a company that I have very much wanted to bring up to full parity. It's been on a bit of a tear lately, as indicated by its "Screaming!" Delta Ratio Reading, but seemed to be tapering off and stabilizing a bit.

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I have heard from others and felt myself that there was much more to be seen from this little Florida insurance outfit, so with a portion of my remaining funds I acquired an additional 23.6% more shares of UVE, which brought its percent allocation up to 3.34%, just over the parity level.

What's Next?

That left a sizeable chunk of change left over. And while I don't like to leave (relatively) big piles of cash lying around for very long doing nothing, there really wasn't anything else that needed to be pumped up to parity, and nothing that I really could pump all the way up to parity with these remaining funds. So, uncharacteristically, I decided to sit on this little egg for a while and watch and wait.

I know from my spreadsheet how much I will collect in dividends in about two more weeks, so I'm toying with the idea of adding the 31st position to my portfolio, which will drop the parity target number from 3.33% to 3.23%, effectively raising all the boats in the harbor (except the little new position, but that will give me something to concentrate on in the coming months).

On the dividends side of these actions, it was about a wash in terms of the dividends I gave up by selling AFL, COP and GD, and the dividends I gained by picking up more PM and UVE, and I still have more than a quarter of the funds I started out with before I bought PM and UVE, with more cash coming in by the 21st of this month. So with those remaining and near-future funds, I may be able to add a new position that will add more dividends to my future, which will end up being a net gain in terms of dividends lost vs. dividends gained for having taken profits. And if I don't add a new position, I'll add more to existing positions, which will also increase the amount of dividends that I will be receiving in the future from what remains of that liberated cash. That's another win, in my humble opinion.

That's how it is at the moment. I'm grateful that my timing ended up being rather good in terms of when I sold off the few shares of AFL, COP and GD, as all have dropped a bit since then, and while both PM and UVE have also slipped a bit, I'm not too concerned about their share price in the near term. I have years to go and many times up and down Mr. Market's roller coaster ride to go, but in the meantime I will be collecting more dividends than I did before each year, and in the end, that's what matters to me.

Disclosure: I am long AFL, AGNC, BBL, COP, GD, JNJ, NLY, PM, TWO, UVE, VOD, WAG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.

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