The scoreboard read First REIT closed $1.20 on 15th March 2013. That price was all time high and in no-man land basically. Based on past 12 months, First REIT distributed 6.58 cents of DPU which translates to 5.48% with reference to $1.20 price level. That was a record low dividend yield for First REIT since listing in 2006 till now. Am vested at average price of $0.621 since 2007 and at that price it translates to a dividend yield of 10.60%, that is 1.9x higher than current dividend yield. That has no doubt struck a question on whether is it time to trim fat for long term investors especially those with a sizable portfolio. Trim fat doesn't mean sell off everything in the portfolio but rather is a tactical move. The fundamental of the stocks could be still intact but concern was more on current price level being over stretching on valuation, running ahead of fundamental.
Trimming fat as a tactical move, what is it ? Take an example say an investor vested in a stock in 2009 (start of the bull run) bought 50,000 share at $0.50 each. Since 2009 till now, it has been giving out dividend yield on average of 7% per annual, that is to say from 2009 till 2012, a total of 4 years the investor has received a total of $7,000 of dividend ( 50,000 x $0.05 x 0.07 x 4). Say now the price level has risen to $1.00, that is 100% from the holding price, the investor should start to consider selling part of the holding to achieve a realized gain so as to reduce the quantity to say 25,000 share (half of it) for the following reasons :-
1. the bull run since 2009 till now could be coming to an end
2. still holding part of the shares as the company fundamental still intact and the dividend yield as compared to bank interest rate still attractive and can still serve as a constant stream of income (though it reduces)
3. after selling off the portion of the realized gain will be used to re-invest back when recession comes next as a form of compound investing.
Say the investor sell off 25,000 shares at $1.00 each and will have a realized gain of $12,500. The sale proceed of $37,500 from that together with the $7,000 from dividend, $44,500, will be putting aside so that when recession comes next, the amount will pour back to re-invest the same stock again when price drops. The exact amount should be more than $44,500 as from now till the next recession, the remaining 25,000 shares still receiving dividend but to simplify, we will fix the amount to just $44,500. If recession comes and price drops to say $0.50 again, this time with $44,500, the investor is able to buy 89,000 share. With that together with the remaining 25,000, total quantity will become 114,000 share at $0.50 each, 2.28x more than the original holding without need to fork out a single cent more. This is the idea of trimming fat for tactical move.
As mentioned before, this is the last leg of the bull run which started in 2009, we could be expecting another up surge in the market from June onwards then having a rather muted year end for 2013 (lot of analysts are expecting rosy year end with some expecting STI to hit 3,400 to 3,600 but keep options open that they will be wrong) and perhaps another last spike up in 1H 2014 before everything falling apart. It has been discussed on the various reasons why recession will come next (After the rally, what's next ?) and looking at the time frame from 2014 onwards it is about time.
Long term investor might argue should I sell off now, might miss more gain later when market surges higher. Well let put it this way, it is impossible to time to sell at the peak and it is also impossible to time to buy at the bottom but it is never wrong to realize a sizable gain. Investor could sell off batches by batches each time market surges higher. Remember to still retain some of the holding (preferably maximum 50%) so that while waiting for the next buying opportunity (could be 1.5 to 2 years later), you are not shut out from receiving dividend income (this is especially true for dividend income driven investment).
Do have a look at your portfolio and start to consider how to trim fat on the portfolio in a tactical move.
