What Next To Buy, Taking Profits, And Why - Part 4

I'll bet you didn't think I'd be writing another article about "taking profits" so soon after the last one, did you? Well, this was a special situation, one that I felt I needed to capitalize on while the opportunity presented itself, and I'm glad that I did.

Taking Profits

One of the stocks that came to my attention through a comment by a regular reader of mine on an article I wrote early last year was Universal Insurance Holdings, Inc. (UVE). I was fortunate in that I bought my first shares of UVE when it was only $5.24 per share, back in April of 2013. I added more shares to it over the next few months, and then UVE took off like a rocket. In the process, it shot well above the 3.03% "parity" allocation level in my portfolio (based on 33 stocks), and the value of my position in UVE had more than doubled by the end of 2013. That meant that if I trimmed UVE back down to a little above parity, I would have enough cash on hand to not only initiate a 34th position in my IRA, but I'd also be able to buy a goodly amount of shares of some other positions that were well below parity.

During the same period, General Dynamics Corporation (GD) continued its rapid growth in value, and while I had already trimmed a bit from it recently, I calculated that I could harvest a wee bit more profit by selling a small number of share of GD to add to my pool of cash, with which I could not only raise the percent allocation of several existing positions, but also increase the amount of income from dividends generated by what I could buy vis-à-vis what I would be selling, and by a significant amount (as in, more than double! More on that in a bit.).

So that's what I did. I gave UVE a good haircut, and GD another small trim, and generated a substantial amount of cash which allowed me to make some very nice improvements to the dividends that my portfolio produces.

Here's a summary of what I did in terms of taking profits in the latter half of January:

			Begin		End	Recent
Company	Ticker	% Gain	Alloc	% Sold	Alloc	Yield
General Dynamics Corp		44.0%	3.37%	10.00%	3.22%	2.34%
Universal Insurance Holdings, Inc.		106.7%	4.80%	36.36%	3.17%	2.58%

UVE has since dropped a bit from the lofty heights it had achieved at the beginning of January, but I'm still sitting at well over a 100% increase in the value of what I have left of it compared to what I bought it for.

What To Add Next?

Of course, I didn't make these sales without having a good idea of where I was going to use the cash that I'd liberated by doing so. Turning to my My Mad Method [MyMM] spreadsheet, wherein I rank stocks based on 15 financial metrics, here's how things stood with the 20 stocks that remained on my watch list:

Orig	Weighted
MyMM	MyMM	MyMM				Recent
Rank	Avg	Rank	Company	Ticker	CDR	Yield
3	9.06	1	Shaw Communications, Inc.	(SJR)	16.3%	4.09%
2	9.65	2	Baxter International, Inc.	(BAX)	19.2%	2.81%
1	10.29	3	Chevron Corp	(CVX)	12.4%	3.24%
6	10.88	4	Target Corporation	(TGT)	23.2%	2.74%
15	11.06	5	CMS Energy Corporation	(CMS)	40.8%	3.90%
18	11.29	6	Digital Realty Trust, Inc.	(DLR)	26.9%	6.30%
5	11.35	7	Procter & Gamble Company	(PG)	13.2%	3.00%
11	11.82	8	Republic Services, Inc.	(RSG)	16.0%	3.19%
7	12.12	9	Reynolds American, Inc.	(RAI)	13.0%	5.20%
4	12.29	10	ExxonMobil Corp	(XOM)	12.2%	2.51%
8	13.35	11	PepsiCo, Inc.	(PEP)	12.0%	2.73%
9	13.71	12	UGI Corporation	(UGI)	10.8%	2.76%
13	13.76	13	Alliant Energy Corporation	(LNT)	10.9%	3.70%
19	13.82	14	Cracker Barrel Old Country	(CBRL)	21.2%	2.68%
10	14.00	15	Colgate-Palmolive	(CL)	13.9%	2.14%
11	14.12	16	Automatic Data Processing	(ADP)	13.8%	2.39%
16	14.35	17	Southern Company	(SO)	9.0%	5.02%
20	15.12	18	Air Products & Chemicals, Inc.	(APD)	13.7%	2.58%
14	15.47	19	Genuine Parts Company	(GPC)	8.8%	2.59%
17	16.00	20	Emerson Electric	(EMR)	10.7%	2.51%

For this ranking I weighted the ranks on the watch list by 25% on the Yield Rank, 5 Year Dividend CAGR Rank, and their standings on the Dividend Champion, Contender and Challenger [CCC] Rank. By using both the Yield Rank and the 5 Year Dividend CAGR Rank, I was effectively weighting the Chowder Dividend Rule [CDR] number of each stock on the watch list once again.

As I noted in my end of year review for 2013, I have been planning on initiating a starting position in SJR in my wife's IRA as soon as I can make a substantial contribution to that account, so the decision of which stock to pick as the 34th position in my IRA wasn't as simple as just picking the company with the #1 Weighted MyMM Rank from the list above. As I mentioned earlier in this article, my primary justification for selling what I did of UVE and GD was that I could use the cash thus generated to significantly increase my annual dividends received; in other words, I needed to initiate a position in something that would return more in annual dividends with the cash I spent on it than the dividends that I had lost by virtue of the sale of UVE and GD.

And so it was that I settled on DLR as the best candidate to add as my latest new position in my IRA, by virtue of it having the highest recent yield of the top 10 stocks on my weighted and ranked watch list, as well as a very healthy CDR number. While there are some great companies ahead of DLR on this list, ones that I've been tempted to pick up before when I had enough extra cash to initiate a new position, I had to keep my eye on my intended goal of giving the dividend income that my IRA could generate a significant boost.

But Wait, There's More

Most of the cash that I'd generated from the sale of UVE and GD went into establishing a 2.60% allocation position in DLR, but UVE (and GD) had done so well for me that I still had enough cash left over to boost several other stocks that were low in their percent allocation in my portfolio by a healthy amount.

Adding DLR as my 34th position meant that my new parity target was now 2.94%, breaking the 3% "ceiling" that so many positions had been struggling to achieve, or even come close to. To determine which stocks I should invest the remaining cash in, I once again turned to my MyMM spreadsheet, this time looking at the stocks that were well below parity and which I was most interested in adding more shares to. This time I weighted the MyMM spreadsheet by 25% for the Yield Rank and 5 Year Dividend CAGR Rank again (effectively a CDR rank, again), but I also ranked the Percent Allocation by 50%, meaning those stocks that were less represented in my portfolio would receive a better ranking.

Here are the results of that ranking:

Orig	Weighted
MyMM	MyMM	MyMM				Recent	%
Rank	Avg	Rank	Company	Ticker	CDR	Yield	Alloc
3	7.4	1	Altria Group, Inc.	(MO)	19.5%	5.16%	1.83%
2	7.4	2	Textainer Group Holdings Ltd.	(TGH)	22.9%	5.20%	1.91%
7	8.4	3	Resource Capital Corp	(RSO)	35.5%	13.51%	2.81%
4	8.9	4	Omega Healthcare Investors, Inc.	(OHI)	15.4%	5.99%	2.14%
1	9.0	5	BHP Billiton plc	(BBL)	22.8%	3.82%	2.83%
6	10.1	6	National Presto Industries	(NPK)	23.5%	8.34%	2.85%
8	10.3	7	AT&T	(T)	9.9%	5.46%	2.49%
9	11.3	8	National Grid, plc	(NGG)	16.3%	6.24%	2.95%

Based on their Percent Allocations at the time, the decision about where to invest the remaining funds was relatively easy. MO, TGH and OHI all needed a leg up, and they all sported very healthy yields, which meant that between them and the addition of DLR to my stable, I would see a substantial increase in the annual dividends from the cash I'd freed up from UVE and GD compared to the dividends I would have received from those two.

Here is a look at what I was able to do for MO, OHI and TGH in terms of the percentage increase to their previous allocations, and their new Percent Allocations in my portfolio:

		%	New %	Recent
Company	Ticker	Incr	Alloc	Yield
Altria Group, Inc.	MO	42.9%	2.62%	5.16%
Omega Healthcare Investors, Inc.	OHI	15.8%	2.48%	5.99%
Textainer Group Holdings Ltd.	TGH	33.3%	2.55%	5.20%

Summary and Conclusion

Thanks to a helpful tip from a regular reader, UVE was brought to my attention as a stock with real growth possibilities, and I was lucky enough to realize a significant gain in my investment in it. Combined with another small trim to GD, which has also been doing very well of late, and a timely collection of dividends, I was able to initiate a new position in my IRA, bringing the total number of stocks held in that account to 34, and lowering the parity target of Percent Allocation of each position to 2.94%. In addition, I was able to add to three other existing positions, bringing them much closer to parity than they had been before.

However, the real result of these actions is that the annual dividends that I should receive from these changes will be 120.33% more than the dividends that I would have received had I not sold off 36% of UVE and 10% of GD from my portfolio. In other words, the projected annual dividends from what I bought of DLR, MO, OHI and TGH is 220.33% of the dividends I would have received from the shares of UVE and GD that I sold, had I not sold them. (This calculation takes into effect the reinvestment of only those dollars that were realized from the sale of UVE and GD, and not any collected dividends that were also applied to the purchases.)

While the total value of my portfolio is important, in the end what is more important to me is how much income from dividends my portfolio will eventually be able to produce when the time comes for me to retire from the corporate workforce. And while moves such as I have described here may seem like "thrashing" or "micromanaging" my IRA, an increase in annual income of more than 120% from the newly purchased shares versus the shares sold is significant, at least to me, and will contribute a great deal to my ability to sleep well at night knowing that I'm doing what I can to ensure that I will have an adequate income in retirement to meet my needs.

(Also, please bear in mind that by virtue of using Interactive Brokers, LLC (IBKR) as my broker for my IRA, I pay extremely small commissions, which allows me to do this kind of "profit taking" and redistribution activities; and that since all of this is being done within an IRA, there are no tax consequences for selling something that might otherwise be considered a short-term investment.)

I've also managed to bring all of my positions into a better level of balance versus each other, which is in itself a comfort to me. Here's a look at the current positions in my portfolio, their latest Percent Allocations, and how far above or below parity each of them are (I've also included their Current Yield and my Yield On Cost for your benefit):

	Gain/	Prjctd		As Of:			Above/		Yield
Comb	Loss	Divs	MyMM	1/29/2014			Below	Current	on
Rank	Rank	Rank	Rank	Company	Ticker	% Alloc	Parity	Yield	Cost
10	7	31	8	AFLAC, Inc.	(AFL)	3.35%	0.41%	2.38%	3.26%
8	34	4	5	American Capital Agency	(AGNC)	2.46%	-0.48%	12.53%	7.69%
11	22	23	4	BHP Billiton plc		2.76%	-0.18%	3.99%	4.12%
7	16	16	9	ConocoPhillips	(COP)	3.32%	0.37%	4.19%	4.84%
33	31	10	29	Crescent Point Energy Corp	(OTCPK:CSCTF)	2.85%	-0.09%	7.31%	6.08%
33	24	13	33	Digital Realty Trust, Inc.	DLR	2.53%	-0.41%	6.20%	6.18%
26	21	9	32	Freehold Royalties, Ltd.	(OTCPK:FRHLF)	2.68%	-0.27%	7.87%	8.22%
19	4	33	16	General Dynamics Corp	GD	3.21%	0.26%	2.26%	3.37%
24	8	27	25	Hasbro, Inc.	(HAS)	2.93%	-0.02%	3.15%	4.25%
22	6	32	18	Harris Corporation	(HRS)	3.04%	0.10%	2.38%	3.51%
12	9	28	13	Johnson & Johnson	(JNJ)	2.88%	-0.06%	2.97%	4.00%
26	5	26	31	Kimberly Clark Corp	(KMB)	3.08%	0.14%	3.03%	4.51%
32	25	29	15	The Coca-Cola Company	(KO)	2.86%	-0.08%	2.96%	2.94%
16	2	19	30	Lockheed Martin Corporation	(LMT)	3.71%	0.77%	3.61%	6.02%
1	12	12	6	Lorillard, Inc.	(LO)	3.53%	0.59%	4.49%	5.55%
2	13	11	10	Main Street Capital Corp	(MAIN)	3.36%	0.42%	5.94%	7.32%
23	23	17	19	Altria Group, Inc.	MO	2.62%	-0.32%	5.27%	5.34%
3	10	25	2	Microsoft Corporation	(MSFT)	3.17%	0.22%	3.06%	4.10%
29	15	24	25	National Grid, plc		3.01%	0.07%	3.61%	4.17%
4	33	6	1	Annaly Capital Mgmt	(NLY)	2.15%	-0.79%	11.43%	7.59%
19	29	7	17	National Presto Industries		2.81%	-0.13%	8.66%	7.79%
8	14	8	21	New York Community Bancorp, Inc.	(NYCB)	3.77%	0.83%	6.11%	7.40%
25	19	14	28	Omega Healthcare Investors, Inc.	OHI	2.50%	-0.44%	6.09%	6.40%
26	30	20	12	Philip Morris International	(PM)	2.80%	-0.14%	4.73%	4.17%
5	27	2	11	Prospect Capital Corporation	(PSEC)	2.93%	-0.01%	12.24%	11.74%
12	28	1	21	Resource Capital Corp		2.83%	-0.11%	13.71%	13.06%
12	20	3	27	SeaDrill, Ltd.	(SDRL)	3.11%	0.17%	10.54%	11.03%
31	17	15	34	AT&T		2.52%	-0.42%	5.52%	6.14%
16	26	18	7	Textainer Group Holdings Ltd.	TGH	2.60%	-0.34%	5.20%	5.16%
5	32	5	3	Two Harbors Investment Corporation	(TWO)	2.40%	-0.54%	10.60%	8.33%
21	1	30	23	Universal Insurance Holdings, Inc.	UVE	2.81%	-0.13%	2.87%	6.08%
16	11	21	19	Vodafone Group, plc	(VOD)	3.09%	0.15%	4.24%	5.46%
12	3	34	13	Walgreen Company	(WAG)	3.05%	0.11%	2.23%	3.43%
29	18	22	24	Wisconsin Energy Corporation	(WEC)	3.29%	0.35%	3.75%	3.98%

At this point, none of these positions is substantially above parity, or if they are their Yield is substantial enough, that I do not expect to be taking any more profits any time soon. There is, however, room for many of these positions to move up closer to parity, which gives me plenty of places in which to invest future cash that make its way into my portfolio in the form of dividends collected.

Source: What Next To Buy, Taking Profits, And Why - Part 4

Disclosure: I am long DLR, GD, MO, OHI, TGH, UVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.

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