DGI and market value question

[Amos]

Hi

When investing in DGI we should not consider the market value of a stock, we should only consider the dividends and the fact that they are increasing. Agree?

Assuming you are, here is my question:
Let's say I invested 1,000$ and expect to receive 600$ in 5 years (this is an example). After 1 year, the market value of the stock has gone up by 60% so the stock's value is now 1,600$ (+ dividends you got on its way up).

My initial thought would be to grab the profit. 60% in one year? That's great.... but wait a minute, we are not here for the market value, we are here for the dividends. OK, so let's look at it in a different way. I expected to receive 600$ in dividends in 5 years. Instead, I got this amount after 1 year! why won't I use it? so even when I look from dividends point of view, this means "sell"!

Here are my options:
1) Do nothing, I'm here for the dividends and nothing more.
2) Sell everything! I made a good guess, the stock went up for a reason, who knows what will happen next.
3) Sell only the remainder of my initial investment, in this case 600$ and continue with my DGI plan with the 1,000$ left in the stock.

In points 2 and 3 above, I will use the money I got to purchase other DGI stocks.
What do you think?

[lucas03]

Hi Amos, thanks for asking this question. This is also interesting question for me and hope we get some answers from experienced investors here

After reading so many DGI articles, i wondered why they do not mention valuation more often. I think it is even more important than dividends. For long term investors small price changes do not matter, but big ones definitely do.

I bought CMI for $83 in Jan 2016 and I was wondering if I should sell in Jun with cca 200% XIRR (currently my XIRR is 90% on CMI).
I bought STX for $27 in April and some more for $21 two weeks later. Currently my XIRR is cca 230% and I am wondering if I should sell.

I don't mind not selling at the moment, but for a long term I hope I will learn when to sell. Most DGI investors sell when dividend is cut, but I really do not like idea selling lower than cost basis. I guess I need to come up with my own valuation and sell if there is a big difference?

[crimsonghost747]

Very good question.
Of course in DGI the dividend plays a very important role, both because it's predictable and because it's growing. I don't really calculate things like "I'll get $600 over 5 years for this investment", rather I look at it "I'll get $125 growing at an estimated 5% (plus any reinvestments) per year from this investment for the rest of my life." So in your example: yes you did manage your goal in 1 year instead of 5. But what happens afterwards?

And this leads me to the way I decide whether to sell or not.
When selling a company, I do not consider the gains/losses I will realise. (except for tax purposes). Because that is the past, I'm aiming for the future. So if you sell company A, then where will that money go? As you stated, it'll go to another DGI stock... stock B in this example.
So then the question really becomes "which one of these stocks do I think will do better in the future?" The past performance of stock A and the profit/loss you will realise from it doesn't matter, the choice has to come down to which company you estimate to be a better performer in the future.

So if you feel that stock A is overvalued currently and you're better off putting that money somewhere else, or even keeping it as cash, then by all means you should sell. However if your only reason for selling is "it's up 60%" then I don't see the point.

A couple of small things to add.
-keep in mind the tax consequences of selling your holdings. They can make a big difference.
-If you find a great opportunity in company B, that doesn't necessarily mean that you should sell company A. There are other ways (such as margin accounts) that allow you to get some cash fast in order to take advantage of the opportunity you've found.

[Amos]

(10-01-2016, 05:06 PM)lucas03 Wrote: I don't mind not selling at the moment, but for a long term I hope I will learn when to sell. Most DGI investors sell when dividend is cut, but I really do not like idea selling lower than cost basis. I guess I need to come up with my own valuation and sell if there is a big difference?

At the moment I sell only when there's a dividend cut. In the past year I'm in DGI it was only MUR. I had a wondering about that too, I call it "decreased and deceased", meaning "how many stocks decreased their dividends and eventually fell 100% to the oblivion and how many of them started increasing their dividend again and managed to overcome". I don't have the answer for that but maybe the statistic answer to this question will answer yours.

I think I might open a new thread for that because it's not related to my initial question and I prefer not to mix up 2 different things
OK, I just did: http://dividendgrowthforum.com/showthread.php?tid=1589

[Amos]

(10-01-2016, 10:24 PM)crimsonghost747 Wrote: A couple of small things to add.
-keep in mind the tax consequences of selling your holdings. They can make a big difference.
-If you find a great opportunity in company B, that doesn't necessarily mean that you should sell company A. There are other ways (such as margin accounts) that allow you to get some cash fast in order to take advantage of the opportunity you've found.

- Ofcourse the tax has its role here.

- I was looking at it in a different angle. I have a screener by which I decide what stocks to buy when I have the money. The screener is based on financial info and dividends related info. If I don't have the money, I don't use the screener so I don't "find great opportunity" when I don't have the money . I first see that I have the money and then I "activate" the screener. Meaning the stocks I buy are not compared to another stock but compared to their own market indicators.

[kayboy]

(10-01-2016, 04:24 PM)Amos Wrote: Hi

When investing in DGI we should not consider the market value of a stock, we should only consider the dividends and the fact that they are increasing. Agree?

Assuming you are, here is my question:
Let's say I invested 1,000K$ and expect to receive 600$ in 5 years (this is an example). After 1 year, the market value of the stock has gone up by 60% so the stock's value is now 1,600$ (+ dividends you got on its way up).

My initial thought would be to grab the profit. 60% in one year? That's great.... but wait a minute, we are not here for the market value, we are here for the dividends. OK, so let's look at it in a different way. I expected to receive 600$ in dividends in 5 years. Instead, I got this amount after 1 year! why won't I use it? so even when I look from dividends point of view, this means "sell"!

Here are my options:
1) Do nothing, I'm here for the dividends and nothing more.
2) Sell everything! I made a good guess, the stock went up for a reason, who knows what will happen next.
3) Sell only the remainder of my initial investment, in this case 600$ and continue with my DGI plan with the 1,000$ left in the stock.

In points 2 and 3 above, I will use the money I got to purchase other DGI stocks.
What do you think?

I'm really bad at math, but isn't 1000K a million dollars?

[Amos]

(10-02-2016, 08:12 PM)kaybo Wrote: I'm really bad at math, but isn't 1000K a million dollars?

I tried editing it but it keeps the K and doesn't let me remove it. Maybe you're bad at math but I'm sure you understood I meant 1,000$

[Dividend Watcher]

Amos, excellent question. Had to think about how I would handle it and the ramifications. There are lots of variables here so you need to decide what works for you.

The first thing I'd look at is the valuation where you started and where it is now with that 60% capital gain.

For example, suppose you bought when it was to some measure undervalued and now, because Mr. Market finally realized its mistake, the price is closer or slightly above fairly valued. In this case, I'd probably let it ride and collect the dividend. Who knows how long it will be until the price becomes a bargain again. Now you're sitting there with a nice margin of safety should something serious happen and you need that money.

However, suppose you opened your position when it was around fair value and now it's far above where you think it should be priced at. Is the P/E far above what you think would be justified in the next couple years? Is there a risk that it could sell off back to fair value in the near future or is the company apt to just sit there and wait for fundamentals to "grow" into its new valuation. It helps to look at history here. In this case, unless the P/E was grossly high (think KO with a P/E of 40 of many years ago), or the company can't grow into the new valuation in the next couple years, I'd probably be tempted to hold.

Another factor I would take into account, and I mentioned it above, is what are the company's prospects for the next few years. If you expect it to continue growing at a decent clip, then perhaps standing pat is the better part of valor.

As I also mentioned, what are you going to do with the proceeds? Do you have a better alternative waiting in the wings? Do you feel the need to build up cash? Are you nervous about losing this "windfall"?

Lastly, how long will it be before you need this money to meet your goals?

Only you can decide whats "best" for you. Good luck.

[Amos]

(10-03-2016, 05:26 PM)Dividend Watcher Wrote: Only you can decide whats "best" for you. Good luck.

Thank you for your reply.

I forgot to mention why did I have this question in the first place : this will also explain the last sentence in my original post.

As things are now, I invested money in stocks. Whenever I get X$ back in dividends I open my screener, see the stocks that answer the criteria and choose a stock from it. I plan to do the exact same thing (meaning, I'm not going to cash the money, I will use it for DGIing) but instead of waiting for the dividends to come, I will also use the sold stock money, as if it dividends, so instead of waiting 5 years for the dividends, I can use them after 1 year.

My wandering is between point 1 and 3. I know there's no right or wrong answer here, I wanted to get other people's thoughts about this in order to know whether I'm missing something. You did just that with your reply

I understand that I should consider the stock's PE, This will give me a better understand of the increasing market value of the stock. Thanks for pointing this out.