Before I start, I should say that perhaps dilemma isn’t quite the right word. A dilemma is “a problem offering two possibilities, neither of which is practically acceptable”.
I bought into BP back in July 2010 (before I started the Amateur Investor blog) after the Deepwater Horizon oil spill had hit the shares for six. Shares had shed over 50% of their value, dropping from over 650p to around 300p.
On 1st July I bought shares at 318.5p in the belief that most of the bad news had been priced in. While the Company announced dividends were to be suspended, if they resumed the payments at anywhere near the previous level then that would represent a very attractive yield based on my buying price.
As it turned out I bought almost at the bottom and the shares have gone all the way up to over 500p and at the time of writing they stand at 480.75p – 162.25p above my buying price and a profit of just over 50%.
Now here’s my dilemma.
I bought BP shares as they seemed like a good recovery play (and, therefore, a good candidate for capital growth), but also as a good income play. Buying in at such a “low” price could mean the shares would have a very attractive yield if dividends were resumed anywhere near the level they were being paid at before the Deepwater incident.
When do you sell a share you’ve bought for income?
But when do you sell a share you’ve bought for income? If you’ve bought for income then does the price of the share matter? If a share is paying a 10p does it really matter if the share price is 650p or 300p?
Around the time I started this blog I was looking around at other blogs when I found an article called “When to sell a dividend share?” on the excellent DIY Income Investor blog.
In the article the author writes that they recommend a “buy and hold” approach to shares bought for dividend income, but that there are times when you should sell.
The DIY Income Investor says that some of his (sorry, I’m assuming he’s a he) dividend shares have dropped 20%, 30% or more whilst continuing to pay out a nice dividend.
As I said earlier, “If you’ve bought for income then does the price of the share matter? If a share is paying a 10p does it really matter if the share price is 650p or 300p?”
Anyway, this isn’t the scenario I see myself in. I’m lucky enough (or clever enough) to be sitting on a 50% profit and this is where point 4 in the DIY Income Investor’s article (When to ‘take a profit’ – the dividend yield and the ‘years of dividend earned’ ratio) makes interesting reading.
He says that he employes an “equivalent dividend income years of any increase in capital value” calculation when deciding whether to sell a dividend share.
If one of his holdings is showing a capital gain of 5 times (or more) yearly dividend income then this would be used when deciding whether to sell the share.
This makes perfect sense to me. If you have bought a particular share for the dividend income it will throw off then why hold on to the share if an increase in the price of the share represents years and years of potential future dividend income. You could sell the share and lock in that income now.
Since buying into BP I have received dividends of 4.34p on 28/03/11, 4.28p on 28/06/11, 4.32p on 20/09/11 and 4.47p per share on 19/12/11. That’s 17.41p per share for a 12 month period.
Using a crude calculation this could mean dividend income of 87.05p per share if the dividend rate stayed at current levels. But my shares have increased in value by 162.25p – in other words nearly 10 years of dividend income!
And selling now would mean that this “advance dividend income” could earn even more if invested in an alternative high yield investment.
So everything is screaming “sell”, but will I be missing out on further capital growth and a healthy ongoing (and increasing) dividend payments…