Dividend Portfolio Update December 2019

We completed 2019 with full steam and some significant changes. I had been investigating to switch my portfolio over to another broker for quite some time. The main reason is that with my current broker I cannot buy or sell options on american stocks. Since I move more and more to US stocks in my dividend growth portfolio this has become a limitation which I believe reduces my overall return.

There are mainly two ways to do such broker switch. The first one is to request a transfer of your positions from the old broker to the new one. The second one is to sell everything, move your funds and purchase again the stocks with the new broker.

The first one is a rather lengthy process with costs for each position. Reading about the experience of other people, which is mostly negative, did not encourage me to try it this way. The second one has the cost of commisions for selling and buying and on top you pass by the tax office for any gains. This impacts on the capital employed to work for you and generate dividends.

I then reviewed all my positions and realised that, if I was to sell, I had quite a few ones with gains and some with losses. Overall, with the great year of the stock markets 2019 I would have a gain of about $5,000. Now, in Spain the the capital tax gain is split into buckets but with these figures my tax rate is about 19%. Hence, we talk about $1,000 for taxes. The numbers I read about for the transfer would be in the same region if not more given the number of different shares I hold. So, I made my decision to go the easy way and sell, transfer the money and build up the portfolio again from scratch. One of the advantages doing it this way is to clean out the portfolio by eliminating stocks I do not really want to keep in my portfolio anymore and shift the funds to higher quality stocks. Obviously, there is the risk that in the process the stock prices increase and you loose out on those stocks you want to keep in your portfolio. I decided, in the long run, this potential loss is insignificant.

Liquidation of brokerage account

So just before Christmas I started to go on a big selling trip. I sold one stock after the other. If there was a ex-dividend date still in the last days of December or at the beginning of January I evaluated if I would be able to have these positions purchased before that date in the new account. If not, I would keep them until after the ex-dividend date.

In total I sold 37 stocks in 2019. I have listed them in the table below. For simplicity I converted all stocks into US dollars. The list also includes stocks I sold earlier during the year, for instance, BME I commented in the November Portfolio Update. Of the 14 European stocks had 5 positions with gains and 9 with losses so that the overall result for this part of the portfolio is a negative $542.51 (including commisions). I wanted to get rid of most of them because as a dividend investor the typically (bi)annual payout is somewhat tricky to track. Additionally, the European companies do not have such a commitment to raising dividends over time, but rather adjust them to the performance on a yearly basis. For this reason, a dividend cut is relatively frequent. Not my cup of tea.

The picture on the US stocks is completely different. Here I sold 23 stocks and 19 of them with a gain. In fact, some of them with pretty great gains in just one year, like AT&T (T), Enbridge (ENB) & ABBVIE (ABBV). Remember, I started investing in US stocks during the big sell out in December 2018. This helped the performance massively. On the other end, there are also some losers, namely Century Link (CTL) with their dividend cut and Tanger Factory Outlet (SKT) with their business model in question. As a result, I achieved a gain of $5,765.99 for the US stocks.

Overall, I am left with a gross gain of $5,223.49. Now the tax man wants his share and if I apply the 19% capital gain tax I will have to pay $992.46 on these transactions. Based on the yield on cost of 5.83% that I had before selling (almost) everything, this means it costs me $57.86 on annual dividend income for the rest of my investment life. Quite a price to pay. This is one of the reasons why buy-and-hold strategies in the long-run achieve a better performance. The compound loss after tax year after year adds up to a big number. Nonetheless, I accepted this cost now early on in my journey. Later on, with a much bigger portfolio, this loss would have been significantly bigger (unless markets crash and I sell with a loss). Roughly the same cost I would have had by using a transfer between brokerage accounts due to foregone investments. All in all, a price I accept I have to pay now but will get back on the options income.

In the previous paragraph I mentioned that I sold “almost” everything. I have to maintain a position and chose Endesa (BME:ELE) because I have a short put option which is so far out of the money that there is no market and I cannot close it without putting in a high price to buy it back. It is only a small position and requires me to keep about $1,000 dollar in the old brokerage account. I will hold this stock until the option will have expired in June 2020. At the beginning of July Endesa will pay the dividend and I will liquidate this position. Holding this stock leaves in my PADI only $89.

Building up a new portfolio with the new brokerage account

In December I opened my new brokerage account and put in the first funds. The rest comes in after liquidation of the old brokerage account, retrieving the money and then transferring the money to the new brokerage account. This has taken a few days and we are already in the New Year.

With the limited funds I only repurchased a position I already held in the previous account and it is a monthly dividend payer: Gladstone Investment Corporation (GAIN). I used to hold 60 shares and decided to top up and go to 100 shares in the new account.

One of the key metrics for dividend investors is the Yield-on-Cost (Y-o-C). I was wondering how I should consider the shift to the new account. I figured that it would be most realistic to consider the original investment, adjust for the tax impact on any gains/losses and take the new purchase price into account.

This meant for GAIN:

In summary, my original cost for 60 shares was $593.61 or $9.89 per share. With the sales value of $14.68. this means I made a profit of $286.99, which left me with funds of $826.07 after tax. For the purchase of 100 new shares at $14.24 I had to inject $597.93 additional funds. Hence, in total to buy these 100 shares I needed the original $593.61 + new money of $597.93 = $1,191.54. As a result, the average cost for these 100 shares is now $11.92. I think that this is a good way of reflecting my real cost per share. I will employ the same logic if I invest again in stock that I already held before.  If it is shares of new companies than the new cost is the baseline.

GAIN has a forward annual dividend of $0.84 per share, so this adds back $84 to my PADI. The payout ratio is very high, but GAIN has been able to pay 2 extraordinary dividends during 2019 and the numbers look good. With 2020 staring the dividend had been raised from $0.068 to $0.07 per month per share. With my reduced cost per share compared to current market prices I will hold on to them, even though the stock seems to be overpriced at the moment.

Conclusion

My PADI has been reduced to only $173 after having sold most of my portfolio of the old brokerage account. Money is now flowing in after the transfer period and the first purchase to build the portfolio up from scratch has been made. My journey has now a new, more defined plan ahead to focus on high quality, dividend growth stocks. Expect the numbers go up again very soon. In fact, my portfolio page is always updated (I have left a sheet with the previous portfolio at the old brokerage which will be removed once the transition is complete).

Disclosure: At time of writing long ELE, GAIN, T, GIS, VZ, ABBV, GD, OZK, GOOD, MSM, UNM, SKT, O, DFS, MMM, HD

Disclaimer: I am not a professional investment or financial advisor. The information presented on this site represents my personal dividend growth journey and it is for informational purposes only. Opinions expressed are my own and should NOT be relied on or taken as investing advice. I have no knowledge about your personal situation and before you make any investment decision you should exercise due diligence and must do your own research. Always consider seeking advice from a professional financial and tax advisor.