I have had my eye on Philip Morris (PM) for several months, as it grew to become a little over 6% of my Dividend Growth Portfolio. Six percent is my upper limit, which I treat as a guideline but not an iron-clad rule.
A few days ago, as part of a general review of the portfolio, I slotted all of my holdings into a DG Style Matrix which considers dividend growth rates (slow / moderate / fast / very fast) and yields (low / medium / high / very high).
To my surprise, PM showed up as a medium-yield stock. PM is “never” a medium-yield stock. But it is now, as its price (purple line below) has gone way up in just a few weeks, on top of a steady gain during most of 2024.
That rapid price gain, of course, brought PM’s yield (orange line) down, nearly cutting it in half.
That brought PM into the less desirable (orange) territory of having a medium yield combined with slow growth. PM’s trailing 5-year DGR (dividend growth rate) has been just 3% a year. That’s fine for a stock yielding 5-6%, but not one yielding 3.5%.
Not only that, the price gain ballooned PM to more than 7% of the portfolio, which is more than I want in one stock. And PM became way overvalued in the process.
So for all these reasons, I decided to trim PM. I also decided not to trim too much, because if its price is going to continue to go up, I want to benefit from those gains. In the meantime, I will book some gains already made on a portion of the position.
Bottom line: On February 18, I sold 23 shares of PM for $3,435. That reduces the size of PM in the portfolio to 5.5%, and it gives me more than $3k to spend elsewhere. Shortly after selling PM, I purchased just over $3,400 worth of another stock.
The swap instantly added $141 to my Dividend Growth Portfolio’s annual dividend-run-rate. That’s because the stock I bought yields 7.7%, over twice as much as PM’s yield of 3.5%. This move – trimming PM and adding to another position – came up rather fast due to PM’s rapid price increase. Other than that, it is a straightforward demonstration of normal portfolio maintenance.
In the situation of trimming an oversized, overvalued stock, it is common to be able to execute a swap that ends up increasing the dividend stream, as well as reducing the portfolio’s risk a little by lightening up on the overvalued stock. Both those things happened in this case.
-Dave Van Knapp
P.S. To get the details on the high-yield stock I just purchased — the one that pays 7.7% — as well as instant access to my Dividend Growth Portfolio (and much more), consider taking a free 14-day trial to our premium investment service, Dividends & Income Select.
