When To Consider Cashing In

A critical part of managing a long-term dividend portfolio is establishing (and adhering to) an exit strategy. In our opinion, "Buy and Hold" is not a viable strategy. A proper exit strategy should not only establish a plan to exit a losing trade, but it should also include rules about taking profits on a winner. Managing a long-term dividend portfolio is a constant balancing act between maximizing your income and protecting your capital base. Many dividend investors focus solely on the income number and they leave their hard-earned capital in the hands of Mr. Market. Selectively taking profits when you can will give your capital base some long-term stability and it will help protect you from Mr. Market's mood swings.

Generally speaking, we want to let our winners run. But there are times when a stock rallies (and valuations expand) significantly over a short period of time and its prudent to take some chips off the table immediately. A good rule of thumb that we use for taking short term gains is to sell a stock that has increased over 5 times its dividend yield in a 6-month period. For example, if a stock has a dividend yield of 4.0% and it rallies over 20% within a 6-month period…it's a good time to take some profits. The theory is that if you can lock in 5 years of dividend payments in a 6-month time frame…you should do it! You can then reallocate this capital into a dividend stock that is trading at a more reasonable valuation to replace the lost income.

Source: Seeking Alpha

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