Over Valuation Dilemma

[Robandcindy2]

Both....And....

I agree completely.   Over at SA there was "yet" another attack of sorts on DGI (being dead?).   We create dividend machines that often have a substantial growth aspect (win-win).  Never understand the anti-DGI crowd....

Anyway, crunching some numbers I looked at this scenario from a couple of directions.

1.  Sell out and reinvest in something undervalued...but then where do I put those funds?  Not much undervalued.  And CL is a quality company I plan on holding/adding to until they change my mind.

2.  Take the profit (skim the top) (12 years of dividends in advance) and let the rest ride.  In fact I could do this with 9 companies and squirrel away over $20,0000 in "advanced dividends".  But then I have made the DG machine less efficient...temporarily.  As CL is a keeper, I would want to get back to a 100% position eventually.  And it would take a 25% correction to reinvest those captured dividends at my original price.

3.  Keep this component of the DG machine in place and plug along...but I would kick myself if the new administration/Fed screws things up, we have a major correction, and I could have trapped dividends/profits until the bottom.

I am not a "timer" by any means (I usually avoid Vegas layovers....).  But we are due....maybe.....   (Trust me, landing a 140,000 lbs 737 in a snow storm is way easier).

Some financial know it all once said "you can never be faulted for taking profits".   I believe that what we do here contradicts that.   Taking your DG machine off the road for a spell can cost you...unless your timing is perfect.

The corollary(?) that "doing nothing" with a well built dividend machine is in fact "doing something".....

As I opened with "Wouldn't it be nice to always have this problem?"

"$100 on the Pass Line" please.....

[crimsonghost747]

Rob.
Just to make your decision a little harder.

Have you considered shorting the SP500 and/or using put options for specific companies in order to protect against falling prices? This would provide some protection, while of course biting into potential gains, but it wouldn't affect the dividends received in any way.

[AustralianDividendInvestor]

(10-09-2016, 09:19 PM)rayray Wrote: Let me add, the companies I have divested over the years, for the most part I'm sorry I sold.

I'm in this boat as well. For mine, I try to make a good decision at the start (when I buy) and then try to avoid making bad decisions in the future. Since its hard enough to make good decisions at the start, if I do manage to make one I tend to try to get maximum value from it nowadays.

My one concession to this is that I tend to allocate dividends away from stocks that are expensive if possible.

[DividendDragon]

The approach I take it to sell a % based on how overvalued I feel the company is and its future prospects.
This has worked out well in some cases and poorly in others.

Selling a 33% stake in MSFT at $57 turned out to be a poor decision.
Selling a 50% stake in MCD at $128 turned out to be a pretty good decision.

What is also worth considering is other potential purchases in the market. In both cases I was eyeing other purchases and was keen to re-balance. (Wasn't comfortable holding 15% of my portfolio in MSFT and AAPL).

Overall, in future I think I'd be more inclined to simply hold positions in 'overvalued' companies.

Hope this helps.
Lewys

[Robandcindy2]

(10-11-2016, 11:13 AM)crimsonghost747 Wrote: Rob.
Just to make your decision a little harder.

Have you considered shorting the SP500 and/or using put options for specific companies in order to protect against falling prices? This would provide some protection, while of course biting into potential gains, but it wouldn't affect the dividends received in any way.

Actually have been reading up on this lately.

Thanks
SaveSave

[AustralianDividendInvestor]

The other thing worth considering is where you are in your DGI journey. If you are closer to the end than the start, I'd be more wary of overvaluation than if I was at the start of a 30 year period.

[EricL]

(10-27-2016, 04:58 AM)AustralianDividendInvestor Wrote: The other thing worth considering is where you are in your DGI journey. If you are closer to the end than the start, I'd be more wary of overvaluation than if I was at the start of a 30 year period.

I agree to some extent as younger people can afford a draw down more than someone reliant on their portfolio. I suppose it depends on the retirees situation; if they can live solely off dividends, the relative valuation they pay makes no difference as they aren't worried about capital appreciation, only income. A retiree that relies on capital appreciation for withdrawals is a bit different story.

I'd also point out that buying at a good valuation is still incredibly important when starting out since you are locking in an initial yield that compounds for the rest of your investing life. Buying a utility that normally yields 4% for 3% now when it is overvalued will have a huge impact on your results 30 years down the road. Not only are you overpaying by 33% which cuts down on your capital gains, but you're also compounding at a significantly lower yield over the years as well.

[AustralianDividendInvestor]

(10-27-2016, 08:10 AM)EricL Wrote: I'd also point out that buying at a good valuation is still incredibly important when starting out since you are locking in an initial yield that compounds for the rest of your investing life. Buying a utility that normally yields 4% for 3% now when it is overvalued will have a huge impact on your results 30 years down the road. Not only are you overpaying by 33% which cuts down on your capital gains, but you're also compounding at a significantly lower yield over the years as well.

Everything you've said is right of course. As a general rule I'm happy to see people 30 years away investing in anything, particularly if they are doing it consistently, knowing that at some points they will get expensive stocks and other points cheap stocks (zeroing out stock selection for the moment). I think everyone has met someone who has been "about to invest" for the last five years!