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Investment Analysis Clubs / The BMW Method


Subject:  Re: A learning curve Date:  9/14/2012  11:11 PM
Author:  kelbon Number:  40716 of 42233

I'll take the divvies and the appreciation 24/7/365, and I will still have the same yield as when I started. Or, perhaps I missed a point somewhere along the way; wouldn't be the first time.

Sure, you'll have the same yield from the dividend on the money you spent to buy the stock, and, maybe even more if the company raised the dividend in the interim. But, it's this line of thinking that stops people selling a winner and reinvesting their profits in a stock at a better price with a heftier dividend yield.

You— "I'm getting a 5% return on my purchase price just from the dividend alone, I'd be crazy to sell!"

Me— "Well, how would you like an 8% return instead just from the dividend?"

You— "No, that's not possible, is it?"

Me— "Yes it is, just sell your winning stock and invest all the proceeds in a better prospect with a higher dividend yield."

Here's some math for you: company A, the stock you hold, paid a 4% dividend when you bought it at $20 a share. They raised the dividend since. Based on your original purchase price you're now getting a 5% dividend yield. Let's say you spent $10,000 on the stock and you are now being paid $500 a year in dividend payments (5% of your purchase price.)

Stock A has doubled in value since you bought it. If you sold your shares you would have $20,000 in hand. What's more because the price has gone up so much the dividend yield at the stock's current price is now only 2.5%.

Now, you've ruminated a bit about stock B, which seems like a good solid company that is reasonably priced and has a dividend yield of 4%.

If you sold stock A and bought stock B with the proceeds ($20,000) remembering that it has a dividend yield of 4% you can easily calculate that you will be paid $800 a year in dividend distributions. This would be an 8% return on your original investment of $10,000 from dividends alone — you only have to switch horses to get it.

(I've ignored brokerage fees and possible tax implications for the sake of simplicity; to keep the math as simple as possible.)

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