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Tuesday, 18 December 2012

Random thoughts

I have been thinking ...

There are many passive income investors out there holding on to their paper profit status shares.  The reason for this could be because of their busy schedules and not having the time to monitor both the new investments and divestments of shares frequently.  Or simply for the sake of these paper profit status shares will make them looking really good on the metrics?

If it is the former than it is justified.  They are many investors out there whom does not have the luxury of time to monitor the share price movement every now and then and hence trading is not a good choice but long term investing is the only answer.  Relying on brokers to do the monitoring work?  Probably workable if you are giving good commissions to your broker by doing many buy and sell trades.

If it is due to the latter then it is really not being fair to oneself.   As an example, if l have 20 lots of SingPost which was bought at the price of $0.95 and it is sold off at $1.15 then my nett gain will be $3849.  However, let's say l hold on to it for the dividends at this year's total payout of $0.0625 then l will get $1250 of total dividends.  For ease of calculation so let's assume that the total dividends payout in every year is at $0.0625.  The $3849 nett gain if l have sold it away is 3 years worth of annual dividends.  Imagine getting paid in advance on 3 years worth of dividends!!!

At annual dividend rate of $0.0625 and if SingPost share price is at $0.95, yield is 6.6%.  When SingPost share price is $1.15, yield is 5.4%.  A passive income investor will now have lesser yield dividend then taking the decision to sell the stock at maximum capital gain which equals to getting an advance dividends, which is  equivalent to 3 years (as mentioned earlier) under one year of investment and at an annual yield of 6.6% locked-in.

A paper gain will make one looks good in terms of total returns, but as its share price climbs higher then its yield starts to deteriorate.   But what if the share price suffers in bear market?  So, its yield will go higher.  But then the question is, does it really matter as yet again it will only makes one looks good in terms of total returns but one is not really becoming richer in terms of psychical actual profit collected.

In summary, if an investor is sitting on a paper gain which is worth more than one year's of dividends and having the luxury of time to monitor the share price then do not get oneself short changed.  Just do it - sell it away to get paid in advance on the dividends; and re-investing into it when its share price weakens.  One can never tell when a particular stock suddenly skive on dividends - for example Popular stock counter recently. 

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