This article informs how to effectively manage risk for stocks to include those which regularly pay dividends. For those of you who have been following my stock market investing activities you know that I have been recently buying dividend stocks to include Schnitzer Steel (SCHN) and AGL Resources (GAS). Dividend stocks offer unique opportunities to realize gains due to quarterly, or sometimes even monthly, dividend payments as well as the potential appreciation in the stock prices. This combination can allow you to patiently execute your disciplined strategies and improve your chances of realizing significant gains over timte. This can happen even when the stocks you are initially holding significantly decline. In fact, I often earn greater gains overall when the stocks that I initially buy decline, because I tend to grow my position over time through price averaging such that when the stocks I’m holding stage a rally a larger profit is earned across my overall investment accounts.
Here’s an example of some of the strategies that I employ which work fairly well; especially for stocks which pay a dividend. Imagine that you initially buy 200 shares of XYZ stock at a notional price of $10.00 which pays an annual dividend of 5%. The very next step that I now take for all stocks that I initially buy is to decide “up front” what I reasonably consider to be a substantial gain in the stock price. This can vary depending on the nature of the stock, but I usually target a 5%-10% gain as a reasonable substantial gain for many of the stocks that I’ve held although for those which tend to be highly volatile in nature I might try to get 15% or 20%. Let’s assume that we consider a 10% gain to be a reasonable expectation for a substantial gain in the XYZ stock. I next proceed with immediately putting in a sell order for the shares I initially bought at a sale price of $11.00 (10% gain from the $10.00 price that I initially bought them at). If the price ever touches $11.00 the shares would then be immediately sold for this “substantial” gain. This “up front” strategy is something that I use for all stocks that I buy, not just dividend stocks. However, here is a demonstration of an additional strategy that I now employ for dividend stocks: If the XYZ stock price declines by twice as much as the annual dividend (a 10% decline in this example since the notional XYZ stock paid a 5% dividend) then I price average into it by doubling down on the stock at that point in time. Thus, the initial 10% loss would be immediately transformed into a 5% loss. A loss which could notionally be completely erased in a year’s time by the dividend payouts alone even if the stock does not appreciate in value within that timeframe. In addition, for the new set of shares I purchased, I would again decide “up front” what I considered to be a substantial gain (e.g., 10% gain) and proceed with immediately putting in a sell order for this set of shares at the 10% gain price to immediately cash in on this should the stock ever touch this price. If the XYZ stock declines another 5% (10% loss total overall) then I would again double down on the stock to transform that 10% loss into a 5% loss which could again potentially be completely mitigated solely by the dividend payouts in a years time and once again decide “up front” what I considered to be a substantial gain for these new shares (e.g., 10% gain) and proceed with putting in a sell order for these shares at the 10% gain price. Even if the XYZ stock experiences a series of back-to-back significant declines you can grow your position and posture yourself for potential future gains, because declining stocks generally do not go down in a straight line. They tend to rise and fall over time. So chances are that if you are patient, and stick with your strategy, you will realize substantial gains due to the combined effect of the dividend payments and the stock price appreciation. This combined effect can significantly reduce your risk and increase your chances of success. Typically, when employing these strategies, I target stocks which pay between 3% and 5% in annual dividends. Anything less does not buy you much in terms of managing risk via these strategies and anything above is typically unsustainable and likely to result in future dividend cuts or suspensions unless the investments you are targeting historically have paid higher dividends such as some Real Estate Investment Trusts (REITs) and high yield bond funds.
The above strategies do not consider the tax implications of the dividends or capital gains which might be earned so you might want to make adjustments if you would like to factor these in. In addition, there is always the chance that dividend payouts could be reduced or suspended, however, frequently dividends are increased over time. In either case, the above strategies work fairly well as a starting point, but you should periodically evaluate how well your strategies are working for you towards supporting your investment goals and make adjustments over time to improve the effectiveness of the strategies that you employ. I have developed and employed many investment strategies over the years, some of which I have written about in these articles, and frequently have evaluated these strategies and made adjustments to them over time such that they better supported my investment needs. I encourage you to do the same.
The strategies that I have presented in this article will allow you to take advantage of the natural volatile nature of stocks such that even those which significantly decline over time can result in minimal losses or perhaps even substantial gains. Often, these strategies will result in a series of buys on significant declines and a series of sells on significant rallies as well as dividend payouts for the shares that you hold the night immediately preceding the established ex-dividend dates. Selling a portion of your gains all along the way allows you to use the cash that you raise to buy additional shares should the stocks you are holding reverse and decline if the risk-reward for these stocks remain favorable in nature.
Substantial gains can often be realized using these strategies, if you are patient, because lagging stocks frequently become leading stocks over time and the dividend payments from dividend stocks can allow you to receive incremental gains all along the way while you patiently wait for the stock price appreciation to happen. Developing and refining strategies “up front”, such as those that I have discussed in this article, is critical to your success as an investor. Doing this well can transform you from being an emotional investor into a disciplined one who realizes steady and consistent success over time. I have developed several solid strategies for clients that I work with depending on the client’s risk category, the type and nature of the stocks being considered, the investing environment at the time, and the risk-reward indicators that I generally look at. Feel free to contact me if you’d like to find out more.
This article informs how to effectively manage risk for stocks through pre-planning and effective techniques and strategies to include stocks which regularly pay dividends; even when the stocks you are holding significantly decline. Part of being a solid investor is recognizing opportunities when you see them and promptly capitalizing on them when the risk-reward of securities you are tracking become highly favorable (as a buyer) or highly unfavorable (as a potential seller or short seller) in nature. By periodically rotating out of investments which become less favorable and into investment opportunities which become more favorable in nature you will realize consistent investment success over time. You won’t make winning investments all of the time, but the point is to use strategies and techniques which allow you to make winning investments for much of the time. I can help in these regards.
Please contact me if you need any assistance with any of your financial planning, management, and/or investing needs as this is one of the areas that I actively perform life coaching and training in. Also feel free to click on “Financial Planning, Management, and Investing Related Posts” to the sidebar on the right or below (depending upon which device you are using to view this article) for helpful tips on how to become a solid investor. These articles provide helpful tips on how to become a solid investor so read through some of these if you think they might be helpful to you. In addition, in case some of you would like to follow along, here is where I regularly post about my stock market activities. So feel free to visit this page if you would like to follow what I’m doing in the stock market at any given time.
For those that did not know, I generally perform life coaching and training services in two primary areas: 1) Personal and Professional Improvement, Development, and Growth, and 2) Financial Planning, Management, and Investing. As such, I generally alternate the articles that I write via my blogs between these two topic areas. This particular article is associated with the second area that I life coach in. So if you do not have much interest in financial planning, management, and investing, rest assured that one of the next articles that I write will be in the area that you might have greater interest in; the personal and professional improvement, development, and growth area. You can also follow me on Twitter if you like at: Joseph M Brennan Jr @ BrighterDaysLC
Joseph M. Brennan Jr.
CEO/Life Coach – Brighter Days Life Coaching
“Your Brighter Days Life Coach for Life”
Make a Bad Day Better
Make a Good Day Better
Create a Brighter Life