How To Use Dividend Yield as a Reliable Sell Indicator
How To Use Dividend Yield as a Reliable Sell Indicator
When to sell a stock has always been a mystery; till now.
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When to sell a stock has always been a mystery; till now.
Buying a stock relies on many factors
When to sell is always a mystery for investors
Sell too soon and miss out on potential profits
Sell too late and suffer avoidable losses
Investors have historically found it easier to start accumulating stock than disposing of it. Emotional factors play into FOMO (fear of missing out). Once an idea has been hatched and enthusiasm has a grasp on you, every uptick in a stock’s price confirms you better get in before it’s too late.
But the notion of when to sell has always been a mystery for investors. If you sell too soon, you’re bound to miss out on future potential profits, or so your brain tells you. “ Sell your losers and let your profits run” constantly wafts through your investor brain. The uncertainty is enough to drive you batty.
“Bulls make money, bears make money, pigs get slaughtered”. This one also runs through your busy brain. Should you sell now and take your certain profits, or hold on for further gains? At the same time, intellectually, you know that if you hold too long, being a pig about, you’re eventually going to get slaughtered when your stock hits a brick wall some time down the road. You didn’t know when to sell at the peak, and you still don’t know when to sell on its fall from grace. That big, fat profit you once had turns into a gaping hole in your portfolio.
What Should You Do?
One very reliable indicator that can help you make your decision as it concerns dividend stocks is the historical relationship between stock price and dividend yield.
Realty Income (O) is a real estate investment trust, otherwise known as a REIT. By law, it must pay out at least 90% of its net income as distributions to shareholders. This company has been so good at doing this that for over 35 years it has been increasing its dividend payout to shareholders, each and every year.
Notice from the above chart that O’s stock price, denoted by the purple line, has risen inexorably from the $10 price point to over $74 over a 30 year time span. 7.4 times growth in terms of stock price beat out the S&P 500 and inflation, hands down. In addition to that increase in asset value, the company paid out a handsome dividend year in and year out. Denoted by the orange line, you can see that the dividend yield hewed close to the 5% mark for most of this period. So, on top of fantastic return based on the stock price, the investor also benefited from a 5% return in terms of dividend payments.
The Sell Indicator Staring Us in the Face
Now, let’s look at the same chart and focus on the boundaries mapped out by the red lines. Note how each time there is a significant drop in dividend yield (orange Line), the stock price hits a peak (purple line), then shortly thereafter begins a free fall. Each peak in price is accompanied by a big drop in the dividend yield. And each trough in the dividend yield is soon followed by a new peak in price.
For the dividend investor looking for a reliable sell signal, this is as close as he can get to a certainty.
Why Sell at Such a Peak?
Why sell, you may ask? Well, if you’re an income investor the opportunity to cash out after years of price appreciation and huge increases in dividend income can present some huge possibilities to grow income and capital gains yet some more.
Let me demonstrate. Let’s say you bought 1000 shares for $10 and now have the opportunity to sell them at $74. Your $10,000 investment has now grown to $74,000.
Your capital gain would be:
$74,000 - $10,000 = $64,000 capital gain
Those 1000 shares today pay you a dividend income of $3160 per year.
$3.16 dividend X 1000 = $3160.00
Now, if you sold your shares for $74,000, then invested the proceeds in another REIT that pays you, say, a historically consistent 8% dividend yield, your income would instantly skyrocket:
$74,000 X 8% = $5920
From this one strategic maneuver, your annual income has grown from $3160 to $5920, just from swapping one stock for another. In fact, you’ve almost doubled your income.
Rinse and Repeat
This may sound repetitive, but take a look once more at the same chart:
Each time peak stock price has been reached, a new bottom forms some time later. Shortly after that bottom comes a new peak in dividend yield comes about. This is simple math. Though the price is tanking temporarily, the company continues to raise the dividend. Because the higher dividend is being paid out on a lower stock price, the yield must rise. And so, this is the next opportunity to once again begin to accumulate the stock. The lower the price, the higher the dividend yield. So if you buy at this lower price point, you take advantage of the opportunity to increase your annual income, yet again. Rinse and repeat.
This indicator will give you a heads up when to sell, and then when to buy. Each experience enables you to constantly grow your dividend income, much higher than if you simply let your profits run and stayed pat.
Being active in your portfolio management can give you much more advantages than passive investors. In fact, it is their passivity that allows your active management to succeed.
Your Takeaway
Till now, when to sell a stock has always been a mystery. I monitor these metrics so you don’t have to. I’ve been helping my newsletter subscribers achieve these types of gains for over twelve years, using active portfolio management techniques like these to grow capital and annual income, significantly outpacing the broad market indices. You’re invited to join us.
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Other articles you may find valuable reading:
Investing in Realty Income: A Smart Choice for Monthly Dividends
Proper Stock Position Sizing: Key to Portfolio Success
What If No One Ever Sold Even One Share of Stock?
Most Recipients Aren’t Interested in Waiting to Claim Social Security Benefits
Best,
George Schneider
Founder and publisher
Retirement: One Dividend At A Time
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am long all RODAT Portfolio names. The Portfolio continues to build dividend income with reliable, dependable equities which have long histories of increasing the dividend.
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