On January 26, 2016, at 10:45 in the morning, the TOL’s did something we usually do not do…sold shares of stock from our New Life Portfolio. Now before you start yelling “BOO!!!” and throwing tomatoes at us, we had very good reasons to do so. We are self-proclaimed “long-term” Dividend Growth Investors and, for the most part, do not have any plans to sell shares of the companies that we own. With that said, sometimes a great opportunity will present itself and you have to jump on it. Well that opportunity presented itself today and we made the move.
We sold our holding in Realty Income Corp (NYSE: O) for $55.34 a share. Here is why:
- The share price soared from the original buy. We purchased shares of O at $47.27 on 9/25/15 and sold today at $55.34, a gain of $8.07 (17.1%). Annualized, that is a 51.3% return, not too bad, considering the dividend yield is a little over 4% right now.
- We were overweight in the Financial and REIT sectors. We want to have diversity within the portfolio, with all sectors represented, and that currently is not happening. The TOL’s are just getting started on the journey and building up our portfolio and the allocation is not quite there. It is a work in progress. Before this sale, 5 of the 9 companies were in the Financial or REIT sector, and OHI, another REIT, is our biggest holding. That’s too much for our liking.
- The gain from the sale equaled roughly 15 dividend payments. O pays monthly dividends and, even accounting for the recent dividend increase, would take 1 year and 3 months of payments to equal the cap gains. We feel comfortable taking that cap gain and earning over a year’s worth of dividends up front.
- We prefer qualified dividends over ordinary. Because O operates as a REIT, its dividend is considered ordinary (taxable) income. Therefore, we would be taxed the same, whether we received dividends or receive a cap gain on a short-term sell. As we set ourselves up for a future of reduced, year-end tax bills, one method we will utilize is choosing qualified dividends over ordinary. Qualified dividends receive long-term cap gain tax treatments, and that fits well with our future plans.
- We want to apply extra funds to upcoming debt payoff. At the end of January/beginning of February, we will pay off 1 of our 2 remaining credit cards in a single lump sum payment and apply a large chunk to the remaining card. Selling O will help to soften the impact of these payments and still allow us to pay our regular monthly expenses on-time without interruptions.
- O was approaching “overbought” territory. We sold O near its 52-week high. The actual high, as of January 26, 2016, was $55.54 (1/28/15) and we sold just 20 cents away from that mark. We didn’t even know it was near its yearly high when we decided to sell, so that’s a positive!
- It was started as a tiny position with plans to add to it, but could not because of its run-up. As mentioned in a previous post, this was purchased with “gift” money earlier in 2015. Looking back, we probably should have just thrown it towards credit card debt, but instead chose to put it to work in the market. We had plans to add to it and make it a larger position, but it kept going up in price. Oh well, hard to complain about buying a stock that “kept going up”!
We really think highly of Realty Income Corp, which touts itself as “The Monthly Dividend Company”, and we may look at initiating another position if the price comes back down, which we feel it will. We feel good about our decision to sell and also feel good about using the extra cash to rid ourselves of credit card debt. In the end we netted a 7% gain, which is after we account for commissions, which was about 10% to the amount invested.
Because we sold this position and did not reinvest the funds into another holding, it will affect our total portfolio value and dividend income. However, the effect on our New Life Portfolio is very minimal. Portfolio value dropped about $111 and forward dividend income fell about $4.80, from $177 to about $173. Nothing to lose sleep over. We will resume purchases and building up our portfolio after our credit cards are paid off.
Until next time, my friends…