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How To Raise Portfolio Income By Selling Overvalued Companies

Sep. 14, 2012 8:31 PM ET250 Comments
Robert Allan Schwartz profile picture
Robert Allan Schwartz

What could a dividend growth investor do when one of their dividend growth companies enjoys a rise in share price? (Note that I wrote "could," not "should".)

Suppose you spend $1,000.00 to buy 100 shares of company XXX at $10.00/share. It pays a total annual dividend of $0.50/share, for a 5% current yield. You receive a total of $50.00 every year. You expect XXX to raise its dividend by 5% every year. You are satisfied.

Time goes by. You wake up one morning and discover that XXX's current price is higher than $10.00/share. What could/should you do about it?

You could calm down, and follow the guideline, "Don't just do something, stand there!" You don't have to sell. No one will force you to sell. No one will laugh at you if you don't sell. After all, you bought XXX because you wanted the $50.00/year in dividends, and it still pays you the $50.00/year in dividends. It is doing exactly what you bought it to do. You are still satisfied.

Let's not forget that if the price goes back down to $10.00/share, and you're back to where you started from, you're no worse off than you were before. The only thing that happened is that you missed out on an opportunity. (If I bothered to count up all of my own missed opportunities, I would throw myself over the nearest bridge.) You didn't make money, but you didn't lose money. You followed Warren Buffett's two rules: "The first rule of investing is don' t lose money; the second rule is don't forget Rule No. 1."

Before you sell, you need to understand why you're selling. Just because the share price went up is not necessarily a good enough reason to sell.

Consider the income stream you would receive if you

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Robert Allan Schwartz profile picture
I retired in November 2016 at age 60.My personal investing goal is to own a portfolio of dividend growth companies such that:1) The overall portfolio dividend income is sufficient to pay for all of my routine retirement expenses. I do not ever want to be forced to sell something to produce cash, especially when my asset prices are down. [I have no objection to occasionally choosing to sell something to pay for a one-time expense such as a vacation or a gift.]and2) The overall portfolio dividend income rises each year by more than the rate of inflation, so that my purchasing power does not erode over time.I invest primarily in David Fish's lists of Dividend Champions, Dividend Contenders, and Dividend Challengers. See http://www.dripinvesting.org/tools for those lists.I do not invest in MLP's or BDC's or CEF's or preferreds.I maintain a free web site that contains dividend histories for all of David Fish's Dividend Champions, Contenders and Challengers: http://www.tessellation.com/dividends

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