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Portfolio Update

When to Take Profits in Dividend Stocks

By Roger S. Conrad, on Jul. 28, 2017

My ideal holding period for best-in-class dividend stocks is forever. The share price of a healthy and growing company will, over time, follow its dividend higher. That means capital gains, as well as a rising income stream. And by reinvesting those dividends, your wealth will compound even faster.

Nonetheless, it sometimes makes sense to bank at least a little of your profit in a big winner, even if it’s for no other purpose than the potential to buy back the same stock on a latter date at a lower price.

In a market increasingly affected by exchange traded fund (ETF) volatility, even gold-standard stocks in the steadiest sectors can be carried away by momentum. Being willing to pull out a bit at high prices and put it back in at lower prices when momentum shifts will cut your cost basis, raise your income and boost profits, even after commissions and capital gains taxes.

And keep in mind that we’re now well into year nine of the bull market in stocks that began March 2009. The S&P 500 trades at 21.65 times trailing 12 months earnings and has a dividend yield of less than 2 percent. These are both close to historically high levels of valuation.

High prices alone don’t pull down the market. But there are a number of potential risks to the lofty expectations behind current stock prices. And even the stocks of the safest and strongest companies will come down in a general market retreat.

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