Buy Low, Sell High: A Dividend Investment Strategy Contradiction?

by: David Crosetti


Most Dividend Growth Investors are reluctant, at best, to sell their existing positions. We tend to use a loose standard for making any selling decisions-- and again, for many the most discussed metric for selling a position is that the company in question has reduced or cut their dividend.

The other condition is a major shift in the business model that means the company will face major hurdles moving forward. BAC and many of the other large, former Dividend Aristocrats come to mind.

Perhaps a little out of the box thinking might be beneficial for Dividend Growth Investors to consider. One thing that I've learned over the years is that quality dividend growth stocks raise their dividends every year. By reinvesting those dividends, I am able to own more shares of the underlying company and receive the impact of "compounding dividend growth."

This strategy has paid off well for me and for my children in their portfolio, the Retirement Portfolio for Do It Yourselfers. The proof is in the pudding, so to speak. Their portfolio grew from 100k to more than 170k at the close of the market today, December 30th.


For Growth Investors, the "mantra" has always been "buy low, sell high." It would seem for buy and hold Dividend Growth Investors, that strategy might be a contradiction to how we tend to operate.

Perhaps it shouldn't be a contradiction, however. We, as Dividend Growth Investors, might have a thing or two to learn from the concept of buying low and selling high.


There is no doubt that a buy low, sell high strategy involves some semblance of stock picking (another feared practice to many non-dividend investors).

Some people would have you believe that an entry point for a dividend growth stock is irrelevant. It's the growth of the dividend and the amount of the dividend that are important--not the price of the stock that's important.

Others like to use the dividend yield to set their entry point. I have a practice of identifying a particular company that I want to own (mostly from David Fish's CCC lists) and after doing my due diligence, I determine what yield I want as it relates to the price. So for example, if JNJ is yielding a 3.5% dividend at the current price, I might set a limit order at a price that would give me 3.75%.

Still others use a host of fundamental criteria-- PE Ratios, both MRFY and FYF; PEG Ratios; Return on Equity; Debt to Equity; et al. The problem is that dividend growth investors are mostly going to be buy and hold investors, seeking the income stream that increasing dividends deliver.

However, the argument might be made that having a 100k portfolio averaging 3.5% yield is not quite as attractive as having a 500k portfolio doing exactly the same. Here's the rub. How do you get to the higher portfolio value, so that you can structure a larger and more lucrative dividend stream? The answer just might be-- "Buy low, sell high."


There is nothing more satisfying than owning a core group of Dividend Champions. That core group of stocks can add value to any portfolio over time, but for some of us, we may be on the back side of time.

In order to get to the point where we can have enough money to create that portfolio which will sustain us, it may be time to look at companies that pay a dividend-. It may not be not as large as we normally want as part of our core group, but these companies can give us capital appreciation which we can use to funnel into our core portfolio.

Here is a short list of widely held Dividend Growth stocks. Notice the change in price is without reinvested dividends-- just a snapshot for illustration purposes. If you bought these companies in 2009, your price change is noted in the % change column.

Symbol 12/31/2009 12/31/2010 12/31/2011 % Change
ABT $53.99 $47.91 $56.23 4.15%
COP $51.07 $68.10 $72.87 42.69%
JNJ $64.41 $61.85 $65.58 1.82%
KO $57.00 $65.77 $69.79 22.44%
MCD $62.44 $76.76 $100.33 60.68%
MO $19.63 $24.62 $29.65 51.04%
PG $60.63 $64.33 $66.71 10.03%
KMB $63.71 $63.04 $73.56 15.46%
T $28.03 $29.38 $30.24 7.88%
VZ $33.12 $35.78 $40.11 21.11%

A fair question to ask, based on the discussion here is, "Are any of these companies at a high point and should I consider trimming my holdings in any of these companies to redeploy assets someplace else?" That is not for me to decide for you-- that's something each of us has to do with managing our own portfolios. For me, MCD is at a point where I am trimming my positions, as are MO and COP. These are fine companies, but I think I can do better somewhere else.

Another idea to consider is that over this 3 year window, there was a time and a price point for each of these stocks to have been a great entry point-- MCD at $62.44 in 2009; ABT at $47.91 in 2010; MO at $19.63 in 2009 and VZ at $33.12 in 2009.

The question ahead of us is this: "Have any of these companies ceased to be priced at a "buy low, sell high" matrix?" That's the million dollar question. But, perhaps erring on the side of caution may be prudent for some of these companies and your portfolio growth.


Currently, I am interested in a number of companies. I am looking at them as CCC stocks for the most part and at a price point where I think they offer a deeper look. Here are some on my radar as potential buy low, sell high targets for the next 3-5 years.

Hasbro (NASDAQ:HAS): Hasbro is currently yielding 3.8% and is a Dividend Challenger that has raised dividends for the last 8 years. The FYF PE Ratio is 9.06 and the company ROE is 28%. The price for HAS is down 34% over the last 12 months.

Aflac (NYSE:AFL): Aflac is currently yielding 3.1% and is a Dividend Champion that has raised dividends for the last 29 years. Aflac has a FYF PE Ratio of 6.08. ROE is 16%. The price for AFL is down 23% for the last 12 months.

Becton Dickinson (NYSE:BDX) is currently yielding 2.4% and is a Dividend Champion with a record of raising dividends for 40 years. The company has a FYF PE of 11.6 and a ROE of 32%. The price for BDX is down 12% over the last 12 months.

Emerson Electric (NYSE:EMR) is currently yielding 3.4% and is a Dividend Champion with a 55 year history of increasing dividends. The company has a FYF PE of 11.62 and a ROE of 24%. The price for EMR is down 19% over the last 12 months.

Illinois Tool Works (NYSE:ITW) is currently yielding 3.1% and is a Dividend Champion with a history of increasing dividends for 48 years. The company has a FYF PE of 10.2 and a ROE of 21%. The price is trading down 13% for the last 12 months.

Harris Corp (NYSE:HRS) is currently yielding 3.1% and is a Dividend Contender with a history of raising dividends for 10 years. The company has a FYF PE of 6.63 and a ROE of 24%. The price for HRS is trading down 21% over the last 12 months.


I believe that each of these companies represent a buying opportunity at this point. I think that each of them is undervalued and has the potential for gains moving forward in the next 12-36 months. The dividend yields and the dividend growth rates are in the "sweet spot range". They would be good additions to any portfolio, whether you are an older investor or a younger one.

I would argue that all are priced fairly at this point. You may want to give each of these a hard look, if you are looking for good dividend investments as well as potential opportunities to buy low and sell high.

It goes without question that screening for Dividend Growth companies, that are priced at a discount to intrinsic value is a major factor in managing any portfolio.

Disclosure: I am long ITW, HRS, EMR, BDX, AFL, HAS.