Category Archives: General

Going about dividend stocks all wrong

Dividend yield vs payable dividends

In an ongoing effort to increase my dividend stock holdings and buy more high quality dividend stocks, I’ve come to the realization that I’ve been going about determining dividend goals all wrong.

With the recent market pullback, many, if not all of my dividend paying stocks dropped in share price. The resulting drop in share price artificially inflates a stock’s dividend yield. This perceived increase in dividend yield, in actuality, does not increase the actual payable dividend. Your dividend yield is locked in at the purchase price because the payable dividend doesn’t change with regards to share price. $1/share payable dividend will always be $1/share regardless of changes in share price, but the dividend yield can still change.

It’s important to realize this when purchasing dividend stocks because what really matters is the payable dividend. 100 shares of a stock that pays $1/share will yield $100. Ideally, you want the dividend to increase with time, and there are plenty of dividend paying stocks that regularly increase payable dividends.

I have been focusing a lot on dividend yield, trying to increase that yield to 3-4%, but that really doesn’t matter in the grand scheme of things because I should be looking more at the actual payable dividend.

As of 9/10/15, my dividend portfolio has thrown off roughly $1,600 worth of dividends. This seems low, but is a good start to getting me on track to early retirement. This year was all about reallocating my portfolio to include more high quality dividend stocks in an attempt to increase the dividend payout every year. Because the reallocation process isn’t exactly a one-and-done type of process, but rather a slower, more methodical way of selling certain stocks and buying dividend stocks, the dividend yield for this year 2015 isn’t exactly where I wanted it to be. By the end of 2015, I should be on track to end the year with $2,000 of dividends.

The stock market pullback certainly helped by allowing me to purchase stocks at a discount and to lock in fairly attractive dividend yields.

In recent months, I have purchased shares of Disney, Phillip Morris, and Kinder Morgan. I have also increased my position in PepsiCo and AT&T. On an annual basis, I should end up with $3,000 in annual dividends with these purchases. My goal to end 2016 is to generate $4,000 in dividends.

At the same time, I am looking forward to roughly 10% dividend increases year over year, in an attempt to generate enough annual dividends to sustain daily living expenses.

Here’s hoping.

Taking profits?

When should you start taking profits?

The old adage of buy and hold seems like an easy way of long-term investing, but with the recent market pullback/correction/China fears, it can certainly make one emotional when your portfolio takes a 10% hit in a matter of days. The next logical issue is whether or not to sell and prevent any further losses, hoping for a lower bottom and then buying back in. One could also look at any market pullback as a complete buying opportunity and load up on shares on dips. Finally, the long-term investor could simply turn off the TV, unplug the computer, and ride out the market volatility since the market is likely to recover.

The big mystery is how hard will the market fall and how long will it take for the market to come back up.

The answer? Nobody knows.

That’s why you can never win by trying to time the market. Buy low, sell high. Sounds great in theory, but if you don’t know when low is low and high is high, how can you do that? Trying to time the market is no longer investing – it becomes gambling. I can count the number of times I’ve left the casino a winner on the fingers of my two hands.

Cut losses? Take Profits?

Since nobody really knows when the market is topping out and how low a market will fall during a correction, how can you safely take profits or cut your losses to fight another day?

This is something I am currently working hard on to do. It’s difficult for me to take profits when a stock jumps up 20% because the greedy part of me says, “what if it goes up another 20%? I’d be missing out!” On the other hand, it’s also difficult to cut my losses when I think, “what happens if it goes back up and I miss the rally?”

The most important thing I’ve learned thus far when investing is “throw your emotion away.” Stomp on it, burn it, lock it up and throw away the keys.

Investing with emotions blind you just like it does in everyday life, except this is with your money. It forces rash decisions that typically aren’t the best decisions.

There are certain stocks that I will hold forever, such as my dividend growth stocks, that I will probably never sell and just continue to load up on shares on market corrections such as this one. I have added positions to my AT&T (T) shares as well as initiated positions in Disney (DIS) and Phillip Morris (PM).

On the other hand, I have also cut my losses on Chevron on their earnings release back in July(?). Since then, it has continued to fall another 10+%. I may re-initiate a position in another oil stock in the near future for long-term growth.

On my third hand (or left foot), I have taken profits in Seagate Technologies (STX) (+1.4% with no intention of re-initiating) and some shares of Realty Income (O) before the correction and will hold off on purchasing more shares until the imminent rate hike that would cause a pullback in the stock, or a $44(ish) price point.

The takeaway?

Sometimes it’s better to take your profits and use that money for a future investment. After all, it’s better to have a profit of $1 than to lose $5. I tend to sell either partial or complete positions in stocks after 20-40% depending on the sustainability of their respective growth. Typically, I won’t sell dividend growth stocks simply based on personal investment strategy.

Losses are a little bit more difficult to deal with because that evokes more of a fearful panic emotion that causes rash action. 10-20% is a good point to cut your losses. Depending on the stock and the reasoning behind the drop, you may choose to reinforce and load up on additional shares of a particular stock when it drops that much, but make sure you do your homework before you put more eggs in that basket. I am currently in a slowly sinking boat with Alcoa (AA) and still continue to hold. That may be a mistake. Time will tell.

Just make sure you do your due diligence before making any investment decisions and take my advice with a grain of salt and good luck in the highly volatile market!

Investing Pitfalls

Here, I’ll take a look at investing pitfalls that I may have personally succumbed to and should generally be avoided.

Powered with this knowledge, you can avoid these investing pitfalls and help grow your funds.

investing pitfalls

Investing is never a guarantee

Whether you’re new to investing or have been investing for years, the main thing to realize is that investing is never a 100% guarantee. Sure, the S&P has historically gained 9-10%, but as history can also dictate, those gains can be wiped out in an instant.

It certainly is difficult to see all your hard-earned money invested in stocks get cut in half, and that scares people. It certainly scares me.

The only comfort I have in market corrections is that I’m investing for the future – 10, 20 years down the road. Even though it’s not 100% that the stock market will rise again after a big correction, the long-term time frame allows time for the market to go back up.

Market corrections also allow for shares of good companies to be picked up at discount prices. Buy low, sell high right?

Buy low, sell high?

Conventional wisdom says to buy stocks when they’re low and sell when they’re high. The only issue with this conventional wisdom is, “how do you know when it’s low enough to buy and high enough to sell?”

This investing pitfall involves trying to time the market.

This is super important – you can never always accurately time the market. Sure, you can get lucky and get into the stock market at its lowest point, but you can also get in at its highest point and have nowhere to go but down.

A way to combat trying to time the market is to put investing on autopilot and invest automatically on a standard basis. This is called dollar cost averaging. This averages the entry point of your purchase over time so you may underpay and overpay at times, but will always average out.

You can always set some cash aside to buy extra when the market is down to further lower your entry point when you sell.

Emotions are your enemy

When the market drops 200 points and your portfolio takes a nosedive 5%, what do you do?

What happens if that losing streak continues for several days, or even weeks and your portfolio ends up dropping 20%? 50%?

Any right-minded person would have their stomachs dropped and their emotions running high in fear. The seemingly logical choice would be to sell your positions to limit any additional losses. However, this is possibly one of the worst things you can do if you simply let your fearful emotions take over in a market downturn and sell your positions just because you’re scared.

What happens if when your emotions take over, you happen to sell at the bottom of the market downturn and the market starts to recover and you miss out on the recovery? Plus, you never really “lose” any money until you realize gains or losses by completing a sale of a stock.

Even though you don’t realize gains or losses until you sell, it may be necessary to sell either to lock in profits or limit losses.

Greed is also a deadly emotion that can be one of many investing pitfalls that one might encounter.

Imagine a stock runs up 30% in two days and you’re super excited, hoping that the run will continue and you’ll be able to make 100% or more on this one stock.

So you keep the stock, but in the coming weeks, the stock plummets 60%. Now instead of being in the green, you’re in the red. The previous greed you felt before is replaced with massive fear and you sell based on fear and realize a loss in the end.

Too much greed can be the downfall of man, and in this case, can be the downfall of your stock portfolio.

Lock in profits and limit losses

Typically, if you are saving for retirement, and you are several decades away from retirement, you have little reason to sell positions unless you are reallocating assets. This is because you have time on your side and time typically favors those who wait, even if there is a market downturn, the recovery that generally follows goes above and beyond.

At the same time, it allows you to increase share position in stocks at cheaper prices during market downturns.

You may at certain points in your investing career, to lock in profits. After all, you don’t really realize any gains until you actually sell your shares.

Typically I like to lock in profits for stocks I am not going to hold forever at 40% increase. Oftentimes, I do find that 20% is a much more reachable/manageable increase to be able to lock in profits. You can even just lock in a portion of your position at 20%, then if it continues to rise, sell more to lock in another portion at 30%, and so forth.

On the flips side of the coin, it may also be prudent to ensure you limit your losses by setting a loss limit of 10% (your limit may be different from mine). This limit ensures that the maximum you would lose from any one particular position in a stock would be 10%.

10% is a small number compared to 50% or even 100%.

Something else to keep in mind, is that if a stock drops 10%, it takes roughly an 11% increase to bring it back to what it originally was before it dropped.

My investing pitfalls

My biggest investing pitfalls are that I still let emotions run my investing to an extent. Granted, I have gotten a lot better in systematically and logically doing my investing, I still find it hard to limit my losses and lock in my profits.

A recent example is a highly volatile biotech stock that was up 10% and I figured I should probably sell it to lock in the profits and figured I could buy back in when the price drops, but my 9-5 job obviously took precedence. So, I was unable to take time to put in a sell order for that profit lock. In the coming days, the price of the stock dropped 20%, but I still hold on to this stock due to the nature of the stock itself.

Oil is another great example this year, with the price of oil falling enormously from the start of 2015 and shares of oil companies dropping to 52 week lows. I probably should have sold some of my positions to limit my losses much earlier and bought back in as oil was rebounding back, but I was a little bit too late.

Granted, I was still able to sell before it completely hit bottom and was able to buy back in at a lower price point and kind of made out even right now, it would have been a lot smarter to have limited my losses earlier.