Interesting enough, I’ve been called a “trader” from time to time while I define myself as a dividend growth investor. Which type of investor suits me best? I would definitely vote for dividend growth investor, but I will also admit I trade a lot more than the classic dividend investor.
For many, the number of trades you make in a month or a year often define the type of investor you are. If you trade on a daily basis, you are most probably a penny stock trader or a technical analysis fan. If you trade on a monthly basis, you are an active investor, read trader. If you rarely sell any of your holding throughout years, then you can qualify as a buy & hold investor or a dividend growth investor.
I’m having a hard time with these definitions linked to the number of trades completed. In my opinion, there isn’t a minimum or maximum amount of trades you should complete each year. It all depends on where you are at with your portfolio and your investing strategy.
If you are like me and you have decided to divide your portfolio into two sections (core and growth), you will most likely sell one of your holding every year or two. My “growth portfolio” includes companies that I believe are undervalued for a specific reason. These trades are usually more volatile and include a higher degree of risk. In the past, I bought Seagate Technology (STX) while they were in the middle of a growth crisis doubled with a major flood affecting their production capacity. I also bought Apple (AAPL) before the company split as many experts thought their iPhone was about to die (that was before iPhone5… imagine!). Finally, I bought SNC Lavalin (SNC.TO) as the engineering firm was in the middle of a fraud scandal and was brought to justice by the Canadian Government. These are examples of timely trades where I might now keep these companies forever. My investing horizon for such holdings is 18 to 24 months. This is why I will most likely sell one company in my portfolio each year or two.
On the other hand, the core of my portfolio is built with a long term holding horizon in order to benefit from the full potential of compounding dividend growth. These companies are selected upon the 7 dividend investing principles and will most likely be part of my nest egg forever. However, as I previously mentioned, I still follow each of my holdings closely on a quarterly basis to make sure they all continue to show the following criteria:
- Dividend payment growing each year
- Payout ratios under control
- Company is a leader in its market
- Revenue and earnings on a growing trend
- Company showing clear competitive advantages
These are key factors to ensure dividend growth over a long period. If a company ends-up failing to meet these criteria or doesn’t meet my investment thesis fundamentals anymore, I will pull the trigger and sell it. I’m not just content about receiving decent dividend income, I want each company I own to be prosperous and grow in value. As the economic environment changes rapidly, it is very possible that a company shows great characteristics today yet loses steam over the years. Some of them just hit a speedbump and are already working on solutions while others can’t find a way to get back on track.
Don’t become trigger happy, but don’t be too complacent
There is a thin line between becoming trigger happy and selling any company that fails to produce growth every quarterly report and being too lenient with management. As much as I want to make sure that each company I hold generates ever growing profits, I can also understand that the economy goes through cycles and there will be poor quarters in any type of industry. The idea is to be able to analyze why there are poor results and to look at what management is putting in place to get back on track.
Making too many trades will only increase your trading fees and reduce your dividend growth potential. Not making any trades could lead to you holding bad companies rotting your total return. There is a balance to reach between the two approaches and this is not easy. I guess the solution is not to determine an ideal number of trades to achieve each year. If you must sell 2 of your holdings during a bad year, so be it. Just make sure you don’t do it out of panic or lack of patience. Always review your investment thesis before pulling the trigger. As long as a company meets the reasons why you selected it in the first place, you should not be in a hurry to sell it.
This article was written by Dividend Monk. If you enjoyed this article, please subscribe to my feed [RSS]
This article was written by Dividend Monk. If you enjoyed this article, please subscribe to my feed [RSS]
