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Buying Dividend Stocks Successfully at a Premium

*This post was delivered to readers of The Stock Analysis Waiting List on March 14, 2017.  Join if you would like to receive early releases of posts such as this here.

By far the most common question I have ever received from readers of the blog has been regarding when to buy or sell investments.  Over the years I have very clearly determined this to be one of the most significant barriers to successful investing.

Not only is it difficult to determine the proper valuation of an investment but also when to wade in.  There are tons of ways to value an investment and I can’t argue that one method is better in any significant way then another.  I like completing a comprehensive analysis that includes quantitative and qualitative factors but many investors get good returns by putting in none of that work (indexing) but what works for others may be different.

My approach has always been based on identifying and eliminating risk.  Find a method that enables you to establish a margin of safety, understand the fundamentals that are and will affect the valuation of the company, understand what that company does and find a way to evaluate whether management appears to know what they are doing.  Add in my Value Rules and you should be 90% there.

In Tracking My Monthly Investment Income I posted the following highlights:

  • I do not market time (but)…
  • When great companies are cheap I will buy a lot
  • I don’t only buy when a stock is cheap
  • Great companies will 95% of the time require a good price (rarely cheap)
  • Missing a stock by $2/share does not bother me in the long-term
  • I have countless examples of when I should have bought but didn’t
  • If I buy too early I can always dollar cost average (DCA)
  • Took me 10 years to figure out a successful approach

What I didn’t address was you still need to be in the ballpark of reasonable value to purchase.  A great stock that historically trades at a P/E of 22 and is now at 40 is not a deal.  An investor needs to assess what value they place on an investment, set a target price and be reasonably patient looking for that price.  You can choose to be an absolute stickler to that target price or be willing to buy within a range of that price (say 5%).

The elegance of managing your investments like a portfolio manager (how I tutor my clients) is if you properly manage the equities the above situation is not very common (buying at a P/E of 40).  Most of my time is spent adding to positions on weakness (market downturn) or selling (trimming) the positive positions to rebalance into other undervalued or allocated positions.  Simply as a function of their own success great companies may not be purchased for long stretches in time simply because their valuation continues to rise after your initial purchase and that change requires you to reset your allocation periodically.


  • Stock ABC is a core holding in the portfolio
  • Current allocation is 2.7%
  • Target allocation is 4%
  • ABC is presently trading at a premium of 20% above its target value

What would I do?

I would very likely decide to buy in two tranches; my first increasing the position to 3.5% and the second to bring it up to 4% setting a time frame of 3-6 months for completion.  The objective would be to continue participating in any upside ABC has but also not leaving myself exposed if the price were to erode over the next six months (market correction!).  If I could get ABC at my targeted value after already buying earlier I am ok with that.  This is the price of participating in the market, the price of collecting dividends and the price of managing a portfolio professionally.  You cannot anticipate what the market will do 100% of the time.  So stop trying.  Develop an approach or tactics that take into consideration all the positive outcomes and that minimize the negatives.

For me I counter this approach with preserving a 5-10% cash position in the portfolio or using leverage (when appropriate).  I want to be nearly fully invested and active as the market appreciates but have enough capital available to take advantage of volatility.  If you can target the upside while protecting your downside then investing becomes much less emotional.

If the market drops 20% I view that as a buying opportunity just as I did in 2008-2009 and during each correction since (most recently January 2016).  I might sell a non-core holding or two to raise more cash, but most of my buying will concentrate around my 12-15 core holdings.  Hoping to continue to build on the positions I have worked to develop and raising the annual dividends generated.  If I don’t recover those positions positively for 12-24 months it’s of little concern to me.  I know I won’t find the absolute bottom so I don’t attempt to.  I’ll start buying a little during the hysteria, a little more after the first rally falls flat on its face and when investors start capitulating I’ll sense I’m within that 5-10% of the bottom and finish my purchasing.  If I’m done (no cash) and the market goes down another 5% I’m fairly unconcerned.

Like Warren Buffett if I have confidence in the quality of the companies I’m purchasing the market valuation today does little to impact my decisions. I have to be cautious and make sure I exercise good judgement, but I am more interested in the value of those companies 10, 20 or 30 years down the road.

Do you need help with your portfolio? Feel free to Email Me and we can discuss.

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