- Most people hate have anyone challenge their belief system. I mean, you parents and grandparents gave you sound advice, right? They wouldn't tell you lies, would they?
- Well, not lies exactly, but they could have been giving you bad advice without realizing it.
- We don't embrace change. We don't like to be challenged. We don't like to have anyone mess with our cereal.
- Instead we cling to outdated and outmoded advice, even when the facts prove that advice to be wrong and we continue to ignore the evidence.
- It's as American as apple pie. And it's annoying as hell.
For those of you who are new to my articles or blogs, let me make one thing clear from the beginning. I am a DG investor (Dividend Growth), first and foremost.
For me, that means buying shares in companies that are Dividend Champions, Dividend Contenders, and Dividend Challengers. Those are companies that have a history of increasing their dividends on an annual basis for at least 5 years in a row.
That universe of stocks is large, but I pare it down by focusing on companies that are part of the S&P 500. Over time, I have become familiar with many of these companies and I understand what they do and how they go about doing it.
What You Should Know:
I have shared my valuation metrics with you in many of my articles and blogs. Again, for the uninitiated, I discovered an investor named Geraldine Weiss and one of her valuation metrics is known as "The Dividend Yield Metric."
In the simplest of explanations, The Dividend Yield Metric compares the current yield of a company vs. the 5 year historic average yield of that same company.
When the current yield is greater than the 5 year historic average yield, the stock might be priced at a value.
But then again, it might not be.
Due diligence is critical to stock selection. You have to ask yourself, "Is there something going on with this company that I might have missed?" Sometimes, the answer is "Yeah, you have missed it by a mile."
As in the case of all the positive energy over AT&T (T) lately.
Just so no one gets their panties in a wad, I don't care if you want to invest in (T) or not. Personally, while it meets my valuation metric, relative to current yield vs. the 5 year historic average yield, I am just plain not interested in the company.
Your interest in (T) does not offend me and after all, it's your money, so do what you want. Sometimes you have to get a punch in the face to learn that you don't sit on a Hell's Angel's motorcycle, under any circumstances.
What I Know:
I have bought shares in a number of companies this year and last. I bought the because the Dividend Yield Metric led me to make a purchase and my knowledge of the company (from owning shares over the last 30 years) made me comfortable wit the purchase.
But, I am also a DG Investor who likes to trim my portfolio and "take profits" and this past year was no exception.
Let's look at some of my sales that were in my Roth Account and the mirror of my Roth, my wife's Roth.
I trimmed 14 positions in the Roth portfolio. I have listed the number of shares sold, the price per share, and the proceeds. Then I posted my cost basis for each position, the dollar amount invested and the profit made for each sale. The final column, "Gain/Loss" is stated as a percentage based on each individual transaction.
We were able to take $35,972.50 in profit in each Roth AND we have absolutely no tax liability on that profit.
How does it get any better than that?
Glad You Asked:
When we look at the shares sold, the profit taken, and the current dividend, we can "annualize" the dividend.
The next step in the analysis is to take that annualized dividend and see how many years of dividend payments would we need to have in order to get the profit taken, in the form of dividends.
Take (ABT) for example. We sold 100 shares and took a profit of $7232 on the sale. The current dividend is $1.80 a year (and it will increase, but hang with me for a moment). The annualized dividend payment would be $180 if we held onto those 100 shares. However, it would take 40 years of dividends in order to equal the profit that we realized in selling those shares.
And the good news, is that on every one of these stocks, we are still "long."
By selling shares of these 14 companies, we were able to capture $39972.50 in profits AND when we annualize the dividend stream of these 14 companies, we "gave up" $3416 in dividend income that we would have gotten had we held these shares in our portfolio.
But the $35.972.50 of appreciation means that in this series of trades, we CAPTURED 10.53 YEARS of dividend income that we would have had to wait for had we not sold.
But, I know that this will be very troubling to some people who visit these pages, because it is contrary to the DGI strategy of buying and holding.
Stock prices change all the time. Up and down. There are times, in the life cycle of an investor, where stocks that are owned are priced at a value and times when they are not.
But if you look at any of these companies, you will find that the pattern of valuation has played out over and over again.
One of my favorite companies to own is Procter and Gamble (PG). Not long ago, the "pundits" were telling us that Procter and Gamble was teetering on it's last days. An anachronism in American industry.
But they were wrong.
When (PG) shares trade at a yield point of 3.75% or greater, it's time to buy shares. The last time these shares were "on sale" was in 2018 when you could have bought shares for a price under $75 a share and with a yield that was approaching 4%.
Emerson Electric (EMR) is a company that is priced at a bargain when the shares are yielding 3.25% or more. Since 2012, you could have been in and out of this stock and made a lot of money. Even if you decided to only take your profits and not sell the entire position (as I like to do) your success vs. buy and hold would be dramatic.
Oracle (ORCL) with a yield of 1.75% or more? Back up the truck.
Please understand that I am not being condescending when I say, "You are free to manage your stock portfolio any way that you like."
If you are a buy and hold investor, good for you. If you take profits off the table, good for you. If you choose to exit entire positions when a stock appears to be overvalued, good for you.
It's your money.
But if you are unwilling to consider a point of view that flies in the face of your own belief system, then you are really not doing yourself any favors.
The "opinion" that you are "right" and I am "wrong" is an opinion and nothing more. But if you want to turn an opinion into a fact, there is only one way to do that.
And that is by doing the math.
It takes work and effort, but if you really want to have stock market success, then you have to accept the fact that making money in the stock market is a job. It's work. It's about thinking critically. It's about making judgements when others are afraid of getting out of their own way.
Clinging to a flawed belief system never made anyone any money. And that's a fact.
Analyst's Disclosure: I am/we are long ABT, ABBV, PG, JPM, ORCL, KO, EMR, SO, MRK, MO, SWM. TRTN, PM.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.