Taking Profits with Dividend Payers

The criticism that is often made of dividend-oriented strategies is that they force investors to buy & hold and therefore prevent them from taking their profits. If we buy securities that offer increasing dividends, we have little interest in selling them since each year the yield compared to the purchase cost improves. A priori, we could therefore think that the criticism made of dividends is well-founded. And yet...

First, if the current yield of a stock has fallen sharply because its price has increased, a dividend-oriented investor could very well decide to sell his position to buy a stock offering a higher yield. This would increase his income almost instantly. The yield relative to its purchase cost could, however, decrease.

Let's imagine that 10 years ago you bought shares in "Société de Papy SA" which offered a yield of 3%. Over time, the company has increased its distributions to the point that the yield compared to your purchase cost now reaches 6%. At the same time, the company has been the subject of monstrous speculation and its price has quadrupled. Its current yield is therefore only 1.5%. You can very well decide to sell this stock to buy another one paying a yield of 3%. Thus, thanks to the capital gain realized on the capital, you will double your income almost instantly. The yield compared to your purchase cost will however be halved.

This illustrates how we can take profits while remaining dividend-oriented. Nevertheless, this method raises some questions. If "Société de Papy SA" has been the subject of such significant speculation, it is perhaps because certain large investors have detected in it a significant growth potential for the future. More growth, therefore more profits, therefore more dividends. The return on your purchase cost, already 6%, could very well have also increased in the near future. On the contrary, nothing indicates to you a priori that your new purchase offering you a return of 3% could do the same.

This is why focusing solely on yield is a false good idea. This is also why savvy dividend investors have a reputation for almost never taking profits. And yet this reputation is completely unjustified.

If there is one type of investor who always and systematically takes his profits, it is the one who follows a dividend-oriented strategy. Every year, half-year, quarter, or even every month, he receives a share of the company's profits, and he doesn't even have to pay brokerage fees on it. On the contrary, the conventional trader will have to wait for the profit to be reflected in the stock price to realize his capital gain by selling, for a fee, all or part of his position.