Here are three tips I use to maximize the returns of my dividend portfolio. You can adopt the tips to improve your returns.
The goal? To maximize returns while earning a growing dividend. Some investors think of dividends as a source of cash to pay their bills. That serves as a motivation for them to earn more dividends, until all bills are paid regularly. After which, they become financially independent.
That’s a fine way to think of dividend investing, but you can get to financial independence quicker. Here’s how.
Actively invest available funds in your best ideas
Some investors use dividend reinvestment plans (DRIPs) to build their positions. The good thing is that you can start with a small amount, and the process is automatic. So, no emotion is involved.
If you DRIP quality companies with competitive advantages, perhaps the leaders of their respective industries, then the investments should grow over time.
The downside is that when the dividends are reinvested into the respective businesses, they may not be undervalued.
So, I usually end up pooling my dividends with my available funds (from my active income) and investing them into my best ideas at the time.
For example, recently, I’ve been buying Algonquin Power & Utilities Corp (TSX:AQN)(NYSE:AQN), which just got listed on the NYSE this week. There are other strong reasons to own the utility, including the fact that it should close its Empire District Electric Co (NYSE:EDE) acquisition in early 2017. This transaction will be immediately accretive to the diversified utility’s earnings and cash flows.
Recycle fully-valued capital
The idea here is that fully-valued stocks have little upside left. So, it might serve the portfolio well by selling at least a part of a fully-valued holding, essentially, taking profit and investing the proceeds somewhere else for a higher estimated gain.
The downside to this is that in so doing, the portfolio won’t be a diversified one. What usually happens is that stocks in an industry fall together and rise together.
For example, I bought Toronto-Dominion Bank (TSX:TD)(NYSE:TD) in late August 2015 and recently sold it in mid-November for a 27% gain, including the dividend, the investment returned north of 31% in less 1.25 years!
If you’re curious about the third tip and want to know what the investment community thinks about the tips, check out my Seeking Alpha article on 3 Ways To Maximize The Returns Of My Dividend Portfolio.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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