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Author: Klingsor4 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 103  
Subject: Re: Common Share Dividend Policy Date: 1/30/2006 1:17 PM
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Dear Mr. Oglove,

I've been reading some of your past posts and I'm very glad you participate in this forum. However, I must point out a fallacy with your recommendation on RGC in the previous post. It's a common mistake, but one many investors fail to realize.

You wrote:
"One key question would be, Should an investor purchase RGC at its current price of about $19? The answer has to be, no, because as of December 31, 2004, RGC's debt totaled 95% of capital and equity amounted to only 4% of capital. But an investor who purchased the stock at $23 in 2003, now has an adjusted price of only $11, after deducting all of the dividends they received during the past two years. So the punch line is, Such an investor is now receiving an annual return of almost l1%, mostly tax free. Therefore, on a yield basis, RGC is a good hold."

Not really. I firmly believe that what is good for the goose is good for the gander; If a stock isn't a good buy at $19 for new investors, it's not a good buy for those who hold the stock either.

What an investor has paid for a company is largely irrelevant when it comes to deciding whether a company should remain in the portfolio, with the sole exception of how this holding period is impacted upon by taxes. Although an investor who bought RGC at $23 and then received subsequent dividends can boast about what looks like an 11% perpetual return, that's only happening in his mind; in reality, he's holding a stock with only about a 5% yield that has appreciated about 80% from his purchase price. That's a very real gain and one that, if he doesn't feel comfortable holding RGC after he's adjusted its price for the loss from selling, should be realized.

Even for an income investor, the prudent action would be to make the sale and reinvest the proceeds into a high-yielding stock with better financials or a better risk/reward ratio.
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