Saturday, February 15, 2014

Dividend Dilemma

Well let me try to verbalize this.

At what stage of a dividend stock price rise should I consider offloading the stock I own?

Assuming that a stock were paying a consistent yield of 5% based on my entry price, and it's price went up by 20%. Would it then make more sense at that stage offloading the stock and cash in the capital gain, or continue holding the stock for a projected 4 years to attain that same return, and stay open to the risk that it's price might fluctuate between a capital gain or loss?

It is easy to look back at history and look at the winners where holding the stock for a few years would net the investor huge capital gains AND rising dividends. But how many stocks actually make it that far and can produce such outcomes? Not many. Even if you think a certain company could survive 10-20yrs, with how mich certainty can anyone say that its profits/revenue/dividends would increase? We are so exposed to macro conditions that these things are very difficult to predict (unless you are the Sage of Omaha himself) Wouldn't it be better to cash in all that gain now?

On the flip side, one could also argue not only about the opportunity cost of the above where the stock does continue to over deliver. What about the follow-up deployment of funds? What if, in pursuing a passive income strategy, one were to use those proceeds to invest in a lousy stock an diminishing returns? Wouldn't all that gain be squandered?

Furthermore, if divestment is considered, then at what price would it make it worthwhile to consider so? At this stage, I am leaning towards a 20% capital gain to begin considering a divestment. Alternatively, pegging at 4X the original yield may be more sensible since it means saving on 4 years of waiting on the passive dividends to be doled out. Or would 3X be sufficient?

I'm still having a headache deliberating about this. 

But I have a feeling I will be divesting one of my power stocks soon. Because I can't seem to bear seeing all that paper gain lost in a rising interest rate environment!

Be safe.

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