My strategy relates to buying quality dividend stocks which
fit my criteria, then sit back and hold on until one of
these three events happens. However, there are other ways for investors to actively generate income from dividend paying stocks. Although they are mostly for sophisticated investors, everyone should be aware of them.
One such strategy is active dividend investing. This relates to selling a stock when its current yield drops below a certain threshold. For example, back in 2009, investors could have purchased shares of Aflac (AFL) at $20 or less per share. As a result they would be earning a yield on cost of 6%. However, given the steep run up in the share price since then, the current yield is 2.80%.
The question that some investors ask themselves is whether it makes sense to sell a company yielding 2.80% today, and substituting it for a company which has a higher current yield. After all, this would only increase the current income that the portfolio generates. For investors who are in the distribution phase of their dividend investing lifecycle, any boost in the dividend income could be seen as a nice bonus.
I typically worry about
replacing dividend stocks after I sell dividend stocks when one of
these three events occur. The reason why I don't sell stocks that have gone up so much, that their current yield is low, is because I would not want to miss out on any dividend growth potential.
For example, investors holding onto Yum! Brands (
YUM), might be disappointed with the low current yield of the stock. I purchased the stock last year at $41/share. My
yield on cost is almost 2.80%. The current yield on the stock is 1.80%. Theoretically, if I sold my Yum! Brands stock, and purchased shares
of McDonald's (
MCD) with the proceeds, I would increase my dividend income by 50%. The current yield on McDonald's (MCD) is 2.80%. However, I am careful not to focus too much on one aspect, which is yield.