Are you worried about a market correction in
dividend stocks? Should you be a buy
and hold investor and try not to feel awful when a stock you hold hits highs
and then retreats? Look at Apple,
people are kicking themselves for being greedy.
If you don’t hold, which companies should you sell and why? Below is an outline of the strategy I use.
My decisions about how to handle dividend stocks at their high are
driven by the concept of increasing the “yield on my available capital.” If I invested $10,000 in a stock with a
dividend yield of greater than 3% and now due to the stock price going up, my
$10,000 is worth $20,000 but the yield on that $20,000 is less than 3%, I want
to make a change. I want to make sure
that my “available capital” of $20,000 generates more income.
You are the manager of your resources. Good managers use their resources wisely; in
our case using your resources wisely means getting more income from your
available capital. My approach is
outlined below.
STOCK INFO
|
NEEDED
|
Stock Price
|
5 year high
|
Dividend Yield
|
Less than 3%
|
Dividend Growth
|
More than 7%
|
Covered Calls
|
More than 1%
|
Stock price and current yield of dividend stocks.
Dividend stocks are at their highs and it is
appropriate to have a strategy. If you
own dividend machines that are at or near their five year high and have a current
dividend yield of less than three percent, target them for further evaluation.
Dividend growth rate.
Look at the growth rate of the dividend. How much did they pay per share 5 years ago
and how much do they pay today. With
only those two pieces of information you can calculate how much the dividend
has grown. If the dividend growth rate
is seven percent or more per year, then you may want to keep the stock and add to it if there
is a market correction. A seven percent
increase every year for 10 years means your income will have doubled in 10
years.
Let's use Chevron, CVX, as an example. On Thursday, March 28, 2013, CVX closed at $118.82 which is just below the multi year high of $121.56. At $118.82 the yield is 3.02%. Chevron has a stellar history of dividend increases. March 10, 2008 the quarterly dividend was $.58 per share and this year on March 11, the quarterly dividend was $.90. That represents a $.32 increase. Over the past 5 five years the dividend growth rate was 12.8% per year.
Will CVX's stock price continue to slip? It may. The 52 week low is $95.73. Your dividend yield at that price would be 3.76%.
This is an example of a stock that I will add to on dips.
Can covered calls add enough to yield more than 3%?
If the dividend increase is less than 7%, consider boosting your income by selling
covered calls on the stock. You risk
losing the stock but that may be alright if the stock is at a 5 year high. You, of course, have to be prepared to find another investment that yields more than 3%.
I found a June, 2013 call with a strike price of $37 or one point above the high. The premium from the call is $.45 which boosts my annual income from $1.00 to $1.45 for a yield of 4%. If I lose the stock, I will have a significant gain. All good news.
Conagra Foods, CAG, is a good example. CAG closed at $35.81 on Thursday. CAG's dividend yield at that price is just over 3%. CAG's 5 year stock price high is $35.91. CAG has increased the dividend every year but the rate hikes equal only 6%. Can I create more income by selling a covered call with a strike price that is greater than the 5 year high?
I found a June, 2013 call with a strike price of $37 or one point above the high. The premium from the call is $.45 which boosts my annual income from $1.00 to $1.45 for a yield of 4%. If I lose the stock, I will have a significant gain. All good news.
If you can create an extra one or two percent income
by selling covered calls on a stock to
equal a yield greater than three percent, then keep the stock and search for
covered calls where the premium is equal to one percent.
If you cannot create the extra income with covered
calls, then sell it and move it to an investment that pays more than 3%. You can sell the stock quickly and wait to
find another investment, or you can set a sell stop just in case the stock
price goes down in your absence. Another
technique is called buying a put but I do not cover that technique in this
blog.
Buy and Hold?
Try not to use emotion to decide if you are a buy
and hold investor. Buy and hold as a
strategy, versus actively manipulating a stock portfolio, is favored by
conservative investors. Yet, even the
strongest willed investor hates to see a stock that was at a high go down. Therefore, I use this dynamic buy and hold
strategy. My goal is always to increase
my income. Once you target a dividend
stock as one you might want to sell, considered the guidelines discussed in
this post.
TheMoneyMadam