I have been investing in dividend paying stocks for a few years now, and I am at a cross roads.  I have some pretty good capital gains (percentage wise, not whole dollar amounts) that I am not exactly sure what to do with.  My gut is fighting with my head and I am not sure who to side with.   I think a bit of history regarding my past 3 years with dividend paying stocks might be helpful.

Looking back through my archives I created my perpetual income machine in February of 2010.  That portfolio was held at sharebuilder so I was able to buy fractional shares of multiple companies for a very low price.  Essentially I was buying very small pieces of companies since I was able to buy into 6 to 12 companies for the same $12/month.  So that is what I continued to do (providing 10 or so updates) until my employer told me I had to switch brokers.  I decided to move the account over to Fidelity and retitled the account, Dividend Investment Portfolio (July 2011).  The main difference was that I had to focus on one purchase per month since I no longer had a batch price per trade.  I also started to include income ETFs since they were free to trade on Fidelity.  Eventually, I learned about the other dividend lists that exist besides the dividend aristocrat list and I started using the dividend champion list (October 2011).  From that October 2011 post, the only thing that has changed that I dropped those ETFs and just kept going strong on the account. My main concern was pumping up the cash reserves so I was investing $500 or so a month into the account, but recently that has changed.

Side Note: It is amazing how much my life has changed since I started that account.  Thinking back to February 2010 feels like a different life.  The Wife and I had already suffered one miscarriage (second miscarriage as you might remember was just a few months ago) and we were in the middle of trying for our boy that wasn’t born until December 2010.  Amazing.  In some of those old posts I even discuss saving cash for an eventual move.   Little did I know that it was nearly 24 months after I made mention of it in that first perpetual income machine post.  But, I digress.

I am Not Sure Whether to Capture Some Gains on my Dividend Account

Through a combination of hard work and pure dumb luck this account is up and some of those gains are too large in terms of percentages to ignore (unless I actively choose to do so) – you may have to click the picture to zoom in.

Dividend 1

Dividend 2

I will admit that some of these feelings I think are based on the fact that the market keeps hitting new highs.  If there is a correction these are all pretty big names they are going to get hammered in the fall out regardless of whether they deserve it or not.

My Options Regarding Huge Gains in My Portfolio Focused on Dividends

I came up with 4 options:

  1. Leave the account and ignore the market noise – This account is not for 31 or even 35 year old Evan, but more like 40+ Evan so who cares if there is a hiccup.  The obvious counterargument is that if I can capture some of the gain and use it elsewhere I am setting myself up for even bigger gains when compared to the broad market.
  2. Sell the crazy high ones and start over – Some of those gains are closing in on 30 and 40% even when compared to the broad market these are wins.  Sell the entire lot.  Obvious problems with this option is that I am ignoring why I created the account.  Not much discipline there, plus I am starting my yield on cost all over again.  Probably my least favorite option.
  3. Sell just the gain – Take the gain off the table.  Better than option number 2, but still has the same problems.
  4. Research those that are flying high and only sell if their valuations are all out of whack –  Interesting option.  I would be reverse engineering the reason I bought the stocks.

What Did the Experts Say?

Forget researching the opinion of people who I’ve never met or read I went to two of my favorite dividend gurus, Dividend Growth Investor and Dividend Monk.  These guys are swamped in this world and have had to face it before.  Interestingly, I got two very different answers.

Dividend Growth Investor provided me with 2 links on the subject which he wrote years ago.  Both basically said the same thing – Why would you sell your dividend stocks if nothing has changed about the business?  His feelings are that you are buying for income and every time the stock increases in price all you are doing is ratcheting up your yield on cost.  So, DGI is for Option #1.

During my conversation with Dividend Monk I discovered that this guy is WAY smarter than I when it comes to investing.  Matt, who has a great dividend toolkit and has commented on my portfolio back in 2010, opted for Option #4.   His point was that if they are overvalued they could be overvalued for YEARS and if you can unlock that money and use it for other growth opportunities.  The conversation started to get away from me when he named some ways that I am unfamiliar with in valuing a company.  Researching the acronyms he provided left me confused and reminded me of the “C” I literally begged for in College Calculus.

Considering how much I respect those guys, and I have never been lazy when it comes to the account (just most other things in my life) lets take options 2 and 3 off the table.

Before I make a decision I’d love to hear from others!  

  • Do I ignore the gains and hope that 40 Year Old Evan (who will be better looking I presume) is happy with my decision today OR Do I unlock some of those gains (somehow learning what the F’ DM is talking about) and put it in other dividend growth opportunities?