When there are limited funds with which to invest into our New Life Portfolio on a regular basis, I sometimes have to improvise. This is the main motivating factor behind the “sell/buy” strategy I employ, where I sell an overvalued position and at the same time, with the newly acquired proceeds, purchase a new position. A new position is acquired immediately as I prefer to not have the cash sitting uninvested. The purpose is two-fold:
- It assists in building the portfolio cost basis (though not the portfolio value). This effectively allows me to lock in and reinvest capital gains.
- It increases/solidifies my dividend income stream. When I execute this strategy, the end result should be either an increase in the Projected Annual Dividend Income or a safer dividend as I trade riskier income stream for a safer stream.
On August 23, 2016 I sold 9 shares of United Technologies (UTX) at $108.77 per share, proceeds totaling $978.89 after fees. With proceeds from this transaction, I purchased 14 shares of Realty Income (O) for $67.56 per share, no commission, total cost was $945.84.
The reason for selling shares of UTX was very simple. The ex-dividend date just passed on August 17, and the share price proceeded to rise back to pre-ex date level. That means I was able to squeeze out another dividend payment and not lose capital associated with the “after-dividend price drop”. Furthermore, I was sitting on a Capital Gain equal to more than 6 years of dividend income! My cost basis in UTX was $826.77 and realized Cap Gain was $152.12, a gain of 18.4% (20.7% w/dividends, $19.56), with two purchases made in August of 2015 and February 2016
Realty Income is coming off of its ridiculous 2016 share price rally a bit and had made it down to about 67.50, a level I had previously sold it for recently. I like this company. I really like this company. I like their portfolio of tenants, I like their industry, and I like how they reward shareholders. I have no plans to sell shares again, but instead, add to it over the coming years. I wanted to get in a little lower but decided to execute the trade anyway.
Another perk that made this deal even sweeter was the fact that my broker gave me two free trades due to issues with a dividend payment that was not immediately showing in my account. The free trades expired in 30 days so I had to “use it or lose it”, so I used it. This trade was not done on the commission-free platforms I have available to me, but by not paying $9.90 in commission to sell UTX and buy O, I saved 70 cents per share! O pays monthly dividend so that is equal to 3.5 months of dividends I saved!
After the dust has settled, this transaction added about $10.00 to my annual dividend income. The portfolio is yielding about 4%, so adding $10.00 to my annual dividend income is equal to investing $250, yet I used none of my own cash to earn this income increase! Simply put, Sell/Buys are how I increase dividend income without using my own funds or using very little. It is simply realizing reinvesting cap gains before they possibly disappear from a market correction, bad earnings report, etc.
What tips and tricks do you use to improve your portfolio ?