Author Topic: Best way to re-balance dividend portfolio?  (Read 4522 times)

Breaker

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Best way to re-balance dividend portfolio?
« on: April 19, 2015, 11:00:58 AM »
I am looking at re-balancing my portfolio because one of my investments is now the greater portion of my portfolio.  Since it is paying large dividends I really don't want to sell any of this stock so I am thinking of stopping the auto div. reinvest and reallocating the dividends to other positions. 

Do any other dividend investors have any suggestions on the best way to re-balance a portfolio?  I have not been putting any new money into this stock, just re-investing the dividends.

What if I just leave things as they are and continue to put any new money elsewhere?

I realize this is a fundamental question on re-balancing, I'm just wondering how others handle this "nice" dilemma?

waltworks

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Re: Best way to re-balance dividend portfolio?
« Reply #1 on: April 19, 2015, 11:08:25 AM »
You have fundamentally misunderstood rebalancing. The whole point is that you sell stuff that is doing well/gone up in price and buy things that have lost value (or at least not gained as much). It can be very, very hard to make yourself do that - but if you actually want to, you should in fact be selling your investment in CompanyX and buying whatever you want to rebalance to. You are just making things more complicated than they need to be by bringing the reinvested dividends in here. Look at the value of your portfolio and the AA, then buy/sell to rebalance. Do it again next year (or in 6 months, or whatever). Period.

-W

Breaker

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Re: Best way to re-balance dividend portfolio?
« Reply #2 on: April 19, 2015, 11:35:32 AM »
You have fundamentally misunderstood rebalancing. The whole point is that you sell stuff that is doing well/gone up in price and buy things that have lost value (or at least not gained as much). -W

You are correct in saying that I don't understand selling top performers in order to buy lesser performers.  No matter how I look at it, that does not make sense.  Though I know that is the accepted thing to do.  I have NO clue as to how this idea evolved and if it has been validated.

waltworks

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Re: Best way to re-balance dividend portfolio?
« Reply #3 on: April 19, 2015, 11:39:21 AM »
Google "regression to the mean".

-W

You are correct in saying that I don't understand selling top performers in order to buy lesser performers.  No matter how I look at it, that does not make sense.  Though I know that is the accepted thing to do.  I have NO clue as to how this idea evolved and if it has been validated.

Leisured

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Re: Best way to re-balance dividend portfolio?
« Reply #4 on: April 20, 2015, 05:43:59 AM »
Warren Buffett has repeatedly criticised the idea of 'punishing' a successful stock by selling it if it does well. I am not against rebalancing, but it is certainly odd to sell a good performing stock. Buffett has suggested investing in companies that have a 'moat' around them, such as barriers to competitors. Coca Cola's secret formula is an example of a moat.

Breaker

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Re: Best way to re-balance dividend portfolio?
« Reply #5 on: April 21, 2015, 10:40:57 AM »
Google "regression to the mean".

-W

Walt, I read a couple of articles on Google and as I see it, it basically means that "Things change" and eventually a stock that is up will go down.  There was still no justification for selling winners to pick lesser stocks.  I am wondering if this came about because Stockbrokers make money on the Churn so they obviously want people to sell/buy more often.

Leisured:  Thanks for your reply.  I also wonder if there is a difference in this philosophy when dealing with dividend stocks compared to value stocks.

Breaker

Eric

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Re: Best way to re-balance dividend portfolio?
« Reply #6 on: April 21, 2015, 11:00:11 AM »
It depends on how out of balance you are, but I see nothing wrong with using future contributions to rebalance.  There's no rule that says you have to sell something to rebalance your portfolio.  As long as this will get you back to your desired AA within a year, then I would buy what's needed and call it good.

waltworks

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Re: Best way to re-balance dividend portfolio?
« Reply #7 on: April 21, 2015, 11:25:13 AM »
I think you are conflating some issues.

When people talk about rebalancing, they are talking about *across asset classes* - ie, sell stock to buy bonds (or REITs, or whatever) to maintain your, say, 70/30 ratio.

If you are picking individual stocks, I'm not sure that makes any sense anymore - you can certainly do it, but you're really not reducing your risks much since you're still going to be concentrated in just a few companies. Most people here avoid picking individual stocks simply because of the low probability you'll beat the general market/index, but that's not the question here.

If you are heavily concentrated in one stock, that's probably universally considered bad, regardless of your feelings about picking stocks in general. In your case, you probably want to rebalance to something that is relatively uncorrelated with your awesome stock/company and will give you a more diverse portfolio. Bonds, index fund, whatever. Anything to avoid having a huge stake in the next Enron.

Regression to the mean is a very real thing. It's why there are many companies in the stock market instead of just one (go figure out what the market cap of, say, Apple would be if it rose 10% a year indefinitely...)

-W

forummm

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Re: Best way to re-balance dividend portfolio?
« Reply #8 on: April 22, 2015, 06:52:30 AM »
You're trying to "rebalance" individual stocks that you've selected because you like dividends? I don't think all those ideas typically go together. If you're going to be a stock picker, you have to decide what prices you like a stock at and stick to those. If it gets "too high" based on your estimation, then you might sell it and by something you think is priced "too low". There is no "rebalancing".

outtaheresoon

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Re: Best way to re-balance dividend portfolio?
« Reply #9 on: April 22, 2015, 08:12:03 AM »
My .02...you can always sell just a portion of a stock that has risen, say the initial amount you invested and leave the rest - sorta like playing with the houses $$ at that point.  That way you can continue to benefit from the strong stock (hopefully it continues to rise) and also buy another stock(s) that meet your criteria. 

Heckler

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ColaMan

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Re: Best way to re-balance dividend portfolio?
« Reply #11 on: April 22, 2015, 08:50:56 AM »
If your stocks are held in a taxable account, selling a portion of your largest holding(s) will trigger potential tax liability.  It may be more sensible just to avoid adding to your largest position(s), using new investment $ to add to smaller positions or to purchase stocks you do not currently own.  This should, over time, reduce the % of your portfolio dedicated to the largest holding(s). Diversification is sensible.

Numbers Man

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Re: Best way to re-balance dividend portfolio?
« Reply #12 on: April 22, 2015, 09:04:31 AM »
This situation really makes me curious. So is it better to take the capital gain because you've made a boat load of capital appreciation or let the dividends ride and risk future dividend cuts or loss of stock value? Or maybe dividends keep on rising.

Is this in a taxable or deferred tax account?

skyrefuge

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Re: Best way to re-balance dividend portfolio?
« Reply #13 on: April 22, 2015, 09:40:31 AM »
Since it is paying large dividends I really don't want to sell any of this stock so I am thinking of stopping the auto div. reinvest and reallocating the dividends to other positions.

This sentence contradicts itself, and tells me you don't really understand what dividends are. Which, as a "dividend investor" kind of makes you like a fireman who doesn't understand what fire is.

Dividend payment: reduces your stake in the company and gives you cash in exchange.
Selling shares: reduces your stake in the company and gives you cash in exchange.

Wanting the first but not wanting the second is a clear contradiction.

Essentially a regular dividend schedule is just the company deciding on your behalf to reduce your stake in that company at a regular rate.

- If you feel that rate of divestment is too slow, then you should sell additional shares in order to reach the divestment rate you prefer.
- If you feel that rate of divestment is too fast, then you should reinvest some or all of the dividend payment back into the company.
- If you feel the rate of divestment is just right, that's either a freakish coincidence, or you're just lazily abdicating your investment decisions to the company in question, which would be a strange thing to do since they don't know anything about your portfolio or goals.

The point is that "selling stock" shouldn't feel any different to you than "reallocating the dividends to other positions"; they are just different stages along a continuous spectrum of divestment levels.

Also, if you've been auto-reinvesting dividends thus far, then that means you didn't really want dividend payments in the first place.