Wednesday, January 25, 2017

Taking Profits while increasing Dividend Income

Applying one of my Investment Business Plan rules today, I sold some of my Intel (INTC) shares at a price of $37.70 and at a profit of 127%. That's an awesome return in a 5-year period, not including dividends which I have collected on these shares since 2011.

As a dividend growth investor my main goal when investing in a stock is to generate dependable and growing income via dividends.

In my view, when a dividend paying company fails to raise its dividend annually, it's a sign that company is either not dividend investor friendly or it is in a cash crunch.



Over the years, I have held fairly large number of Intel shares that were acquired at a 15% employee discount while I worked for the company.

Intel not raising its dividend during its recent dividend announcement gave me a solid reason to start trimming my Intel share position.

Below are my Sell/Trim guidelines or rules that I have documented in my Business Plan which you can read in its entirety here:My Business Plan

Individual Stock Sell/Trim Guidelines
  • Immediately sell full position if dividend is cut. No exceptions!
  • Immediately sell if a company is involved in a fraudulent business activity. No exceptions!
  • Sell or Trim if credit rating is downgraded to below investment grade.
  • Trim if stock is in an overvalued territory as determined by valuation ratios and future estimated earnings.
  • Sell or Trim if dividend payout ratio exceeds 95%.
  • Sell if dividends are not covered by earnings and/or FCF.
  • Sell or Trim if earnings and operating cash flow continue to decline for three consecutive quarters.
  • Trim if company fails to increase dividend in the last 12mo period.
After selling these shares, I would still have enough Intel shares left in my portfolio to benefit from any near or long-term upward movement in stock price. However, if the stock does move upward after the earnings report tomorrow, I may sell additional shares to further lower my total Intel share count.

I will be using some or all the cash from my INTC sale proceed to buy shares in a dividend growing company such as Verizon (VZ). VZ has recently reported soft earnings than expected which has resulted in its stock price decline of about 4.5% while increasing its well covered and growing dividend yield to 4.6%.

Verizon is currently my third largest position after AT&T and Intel; though I feel comfortable adding additional shares around $48/sh price which is at a long-term bottom support P/E of 12. The stock is currently trading at $49.79, so just a tad bit higher than my buy target price. I am hoping to add VZ shares in the next few days when it hits or gets near my target price.


At a target yield of 4.7% and at my target price of $48/sh, VZ shares if bought using all of my INTC trade proceeds, will yield about 68% higher dividend income than what was provided by the sold INTC shares. That's a very nice raise and a great way to increase dividend income without adding any new money.

The upside potential from current VZ stock price and for the next three years is around 32% not including dividends. With dividends, I can expect to get a total annual return of nearly 14% over the next three years.


In summary, by applying one of my sell rules, I have reduced portfolio's risk exposure in an overweight stock while taking long-term tax advantaged profits and increasing total dividend income (pending my VZ purchase) by a large margin. Thanks for reading!

Update (2/2/17): I've lowered my buy target for VZ to $46.44 to adjust for the recently lowered 2017 earning estimate of $3.87 (flat from 2016). This should give a yield of 5%.

Disclaimer: I own shares of both Verizon and Intel. 
Author of this article is not a licensed/registered financial or investment advisor and does not provide investment advice. This article is for informational purpose only. Full disclaimer can be read here: Full Disclaimer

2 comments:

  1. Thank you! I enjoy the insight into your portfolio management.

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    1. Thanks for reading and I appreciate your feedback.

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