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May 27 2011  / Strategy Article - Dividend Invest / Dividend Cut

Dividend Stocks That Cut Dividends

PART 3 - Dividend Investment Strategies For The Dividend Investor

PART 4 - Buying Puts For Protection

PART 1 - Are They Good Buys?

PART 2 - The Long Term Dividend Investor

 

 DIVIDEND INVESTMENT STRATEGIES FOR THE DIVIDEND INVESTOR - PART 3

 

INTRODUCTION

 

In Part 1 I looked at a dividend investor who buys a large cap dividend stock after the announcement of the dividend cut is made. In Part 2 I looked at the long term dividend investor who has been in the stock for 10 years and rather than being dismayed at the dividend cut looks at it as a long term opportunity.

In Part 3 and Part 4 I will present a number of dividend investing strategies for those investors who seek to create a dividend stock portfolio for long term dividend income but wants to reduce risk as much as possible.

These dividend investment strategies require a little bit more thinking and strategizing than simply buying the stock and hoping everything works out. In my opinion there is no point in chasing the highest dividend paying stock only to have that stock collapse destroying your dividend stock portfolio.

No commissions are taken into account for any of the trades shown here.

A DIFFERENT PERSPECTIVE ON DIVIDEND INVESTING

Wouldn't it be nice if the entire situation could have been avoided in the first place? How can a long term dividend investor trying to build a dividend stock portfolio, protect himself from such a catastrophe as a dividend cut? While it is impossible to protect from a dividend cut, a long term investor could have considered investing in GE stock from a different perspective, which would mean that his overall share cost basis was low enough that in the event of a dividend cut, an investor's dividend stock portfolio is not severely damaged.

 

What if an investor took a different approach and applied a different dividend investment strategy when buying shares in General Electric stock in the first place.

 

Instead of just buying an additional 100 shares every first trading day of January or whenever there is capital available, the investor instead looked at the previous year chart of GE Stock and followed it to the most recent previous low and then put in an order to buy 100 shares at the previous year's low. Let's look at how this might change the scenario of a dividend cut completely.

 

Below I will show three different dividend investment strategies which all have a common theme - buying at the previous year's low.

 

The Dividend Investment Strategy Explained:

This strategy is pretty simple, but it has significant benefits over the long term. Should an investor want to start investing in a stock, that investor looks at the previous year to find the low for that year. For example in the General Electric Stock Chart below for the year 2000 I see that the low was $41.69. Therefore this year, 2001, I put in my order for 100 shares at $41.69. Let's see below how it works out.

 

GENERAL ELECTRIC STOCK:

 

Dividend Investment Strategy 1:

 

Low of 2000 was $41.69

On MAR 12 2001 the stock reached $41.69. 100 shares are bought for a cost of $4169.00

Dividend Income Earned To May 27 2011 on these 100 shares is - $852.00

 

Low of 2001 was $28.50

On JULY 2 2002 the stock reached $28.50. 100 shares are bought for a cost of $2850.00

Dividend Income Earned To May 27 2011 on these 100 shares is $750.00

 

Low of 2002 was $21.40

On FEB 13 2003 the stock reached $21.40. 100 shares are bought for a cost of $2140.00

Dividend Income Earned To May 27 2011 on these 100 shares is $713.00

 

Low of 2003 was $21.30

Throughout 2004 the stock stayed above $21.30. The investor does not buy any shares

 

Low of 2004 was $28.88

Throughout 2005 the stock stayed above $28.88. The investor does not buy any shares

 

Low of 2005 was $32.67

On JAN 25 2006 the stock reached $32.67. 100 shares are bought for a cost of $3267.00 

Dividend Income Earned To May 27 2011 on these 100 shares is $463.00

 

Low of 2006 was $32.06

Throughout 2007 the stock stayed above $32.06. The investor does not buy any shares

 

Low of 2007 was $33.90

On JAN 17 2008 the stock reached $33.90. 100 shares are bought for a cost of $3390.00 

Dividend Income Earned To May 27 2011 on these 100 shares is $276.00

 

Low of 2008 was $12.58

On JAN 21 2009 the stock reached $12.58. 100 shares are bought for a cost of $1258.00

Dividends Earned To May 27 2011 on these 100 shares is $121.00

 

Dividend cut announced Feb 27

On MAR 2 2009 (Day after announcement) the stock closed at $7.60 . 100 shares are bought for a cost of $760.00 

Dividend Income Earned To May 27 2011 on these 100 shares is $90.00

 

Low of 2009 was $5.67

Throughout 2010 the stock stayed above $5.67. The investor does not buy any shares

 

Low of 2010 was $13.75

To date in 2011 the stock has stayed above $13.75. The investor does not buy any shares.

 

Here are the totals:

TOTALS =  700 shares 

Total Capital Invested = $17,834.00

Average Share Price = $25.48

Dividend Income Earned since Jan 2 2001= $3935.00

COST BASIS = $17,834.00 invested less $3935.00 in dividends = $13899.00 / 700 shares = $19.85 per share which is just above where the stock is presently trading.

 

This is a simple strategy which forces buying at low points and as you can see has the dividend investor at a much lower cost basis. Therefore when a dividend cut is announced the investor can look upon it as an opportunity and not sell out but add to his position.


Dividend Investment Strategy 2:

If an investor desires to place more capital to work every year then the above strategy can be altered to accommodate more capital but with an emphasis at still trying to buy at low points.

 

For example, based on Strategy 1, in a year where an investor is NOT buying shares, in the next year that investor could double their purchase from 100 shares to 200. If another year passed then the investor would purchase 300 shares. Based on this strategy here is the outcome:

 

Low of 2000 was $41.69

On MAR 12 2001 the stock reached $41.69. 100 shares are bought for a cost of $4169.00

Dividend Income Earned To May 27 2011 on these 100 shares is - $852.00

 

Low of 2001 was $28.50

On JULY 2 2002 the stock reached $28.50. 100 shares are bought for a cost of $2850.00

Dividend Income Earned To May 27 2011 on these 100 shares is $750.00

 

Low of 2002 was $21.40

On FEB 13 2003 the stock reached $21.40. 100 shares are bought for a cost of $2140.00

Dividend Income Earned To May 27 2011 on these 100 shares is $713.00

 

Low of 2003 was $21.30

Throughout 2004 the stock stayed above $21.30. The investor does not buy any shares

 

Low of 2004 was $28.88

Throughout 2005 the stock stayed above $28.88. The investor does not buy any shares

 

Low of 2005 was $32.67

On JAN 25 2006 the stock reached $32.67. 300 shares are bought for a cost of $9801.00 

Dividend Income Earned To May 27 2011 on these 300 shares is $1389.00

 

Low of 2006 was $32.06

Throughout 2007 the stock stayed above $32.06. The investor does not buy any shares

 

Low of 2007 was $33.90

On JAN 17 2008 the stock reached $33.90. 200 shares are bought for a cost of $6780.00 

Dividend Income Earned To May 27 2011 on these 200 shares is $552.00

 

Low of 2008 was $12.58

On JAN 21 2009 the stock reached $12.58. 100 shares are bought for a cost of $1258.00

Dividend Income Earned To May 27 2011 on these 100 shares is $121.00

 

Dividend cut announced Feb 27

On MAR 2 2009 (Day after announcement) the stock closed at $7.60 . 100 shares are bought for a cost of $760.00 

Dividend Income Earned To May 27 2011 on these 100 shares is $90.00

 

Low of 2009 was $5.67

Throughout 2010 the stock stayed above $5.67. The investor does not buy any shares

 

Low of 2010 was $13.75

To date in 2011 the stock has stayed above $13.75. The investor does not buy any shares.

 

TOTALS =  1000 shares  $27,758.00 invested = average share price - $27.76

Dividend Income Earned since Jan 2 2001- $4467.00

COST BASIS - $27,758.00 invested less $4467.00 in dividends = $2329.10 / 1000 shares = $23.29 per share.

 

Strategy 2 increased the amount of capital invested in General Electric but it also increased the cost per share. Let's take the same strategy and make one last change for Strategy 3.


Dividend Investment Strategy 3:

Of all the strategies, I prefer the third dividend investment strategy, best. This strategy still purchases additional shares which allows the investor to put more capital into the stock, but ONLY if there is a new low for the overall investment. It is easiest to understand through the example.

 

Low of 2000 was $41.69

On MAR 12 2001 the stock reached $41.69. 100 shares are bought for a cost of $4169.00

Dividend Income Earned To May 27 2011 on these 100 shares is - $852.00

*For the very first trade, the low of the investment is $41.69. This means that I will only buy additional shares is the next low is lower overall.

 

Low of 2001 was $28.50

On JULY 2 2002 the stock reached $28.50. 200 shares are bought for a cost of $5700.00

Dividend Income Earned To May 27 2011 on these 200 shares is $1500.00

*Now $28.50 is the new low for the overall investment. Therefore I purchased 100 additional shares at $28.50.

 

Low of 2002 was $21.40

On FEB 13 2003 the stock reached $21.40. 200 shares are bought for a cost of $4280.00

Dividend Income Earned To May 27 2011 on these 200 shares is $1426.00

*Since $21.40 is lower than $28.50 I purchased 100 additional shares

$21.40 becomes the new all time low for my dividend portfolio.

 

Low of 2003 was $21.30

Throughout 2004 the stock stayed above $21.30. The investor did not buy any shares

 

Low of 2004 was $28.88

Throughout 2005 the stock stayed above $28.88. The investor did not buy any shares

 

Low of 2005 was $32.67

On JAN 25 2006 the stock reached $32.67. 100 shares are bought for a cost of $3267.00 

Dividend Income Earned To May 27 2011 on these 100 shares is $463.00

*Since $32.67 is NOT LOWER than the all time low of $21.40 I only bought 100 shares

 

Low of 2006 was $32.06

Throughout 2007 the stock stayed above $32.06. The investor did not buy any shares

 

Low of 2007 was $33.90

On JAN 17 2008 the stock reached $33.90. 100 shares are bought for a cost of $3390.00 

Dividend Income Earned To May 27 2011 on these 100 shares is $276.00

*Again since $21.40 is the all time low so far in my investment in GE stock, I only bought 100 shares

 

Low of 2008 was $12.58

On JAN 21 2009 the stock reached $12.58. 200 shares are bought for a cost of $2516.00

Dividend Income Earned To May 27 2011 on these 200 shares is $242.00

*Since $12.58 is lower than $21.40, I bought an additional 100 shares

*$12.58 is now the all time low.

 

Dividend cut announced Feb 27 2009

On MAR 2 2009 (Day after announcement) the stock closed at $7.60 . 200 shares are bought for a cost of $1520.00 

Dividend Income Earned To May 27 2011 on these 200 shares is $180.00

*Since $7.60 is lower than $12.58, I bought an additional 100 shares

*$7.60 is now the all time low.

 

Low of 2009 was $5.67

Throughout 2010 the stock stayed above $5.67. The investor did not buy any shares

 

Low of 2010 was $13.75

To date in 2011 the stock has stayed above $13.75. The investor did not buy any shares.

 

TOTALS =  1100 shares  $24,842.00 invested = average share price - $22.58

Dividend Income Earned since Jan 2 2001- $4939.00

COST BASIS - $24,852.00 invested less $4939.00 in dividends = $19,913.00 / 1100 shares = $18.10 per share which is below where the stock is presently trading.

 

This last dividend investment strategy requires after a collapse such as GE stock experienced, that the investor eventually picks a new low stock price target. For myself I would have picked $12.58 the low of 2008 and should the stock not fallen to that level for several years I would have moved to $21.30, which is the previous low. Based on $12.58 I still would not have purchased any shares in 2010, as the stock stayed above $12.58.

The advantage of this strategy is that it forces an investor to purchase more shares of a stock while it is cheaper and purchase less stock when it is expensive.

You can also see from this strategy how an investor interested in long term buy and hold dividend investing can create some protection for himself against buying stock when it is overvalued and continuing to purchase stock when it is undervalued.

 

SUMMARY

Does this type of strategy work for every large cap that cuts its dividend and collapses? No, but it can help. Stocks like Citicorp, AIG and others can destroy an investor's portfolio. Overall this is why I do not believe in buy and hold. I believe options are a much better choice for investors. In Part 4 I will look at a put buying strategy on GE Stock and how I would have applied it over the course of the last 10 years in General Electric Stock.

 

In Part 4 of this article, I look at the strategy of purchasing insurance against a catastrophic loss through buying puts for protection.


INDEX

Dividend Stocks That Cut Dividends

PART 1 - Are They Good Buys?

PART 2 - The Long Term Dividend Investor

PART 3 - Strategies For The Dividend Investor

PART 4 - Buying Puts For Protection

 

Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed or presented are financial advice, trading advice or recommendations. Fullyinformed.com is a private website. Everything presented and discussed are the author's ideas and opinions only.
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