Taking Money Off The Table By Trimming Share Positions

Over the past week, my online broker had technical difficulties with their website which meant that I was unable to deal in certain securities. Rather than sit and do nothing like most customers, I decided to call them up to voice my disappointment at the level of service. As a result, I got two free trades which was a win from my perspective.This provided a great opportunity to clean up my portfolio by selling my Telefonica position and trimming G4S as its share price has run ahead of its valuation.

Let’s start with the outright sale first. Telefonica has risen 21% since I bought it one year ago and I don’t believe the share price at present encapsulates the risks in the stock. Furthermore, I have significant exposure to both BT and Vodafone in my portfolio and it doesn’t make sense to own a third telecom stock. So I took this free opportunity to sell out of the position for a nice gain. My total return during my ownership of Telefonica is 27%!

I used my second free trade to reduce my position in G4S. I trimmed my position in G4S as opposed to selling it outright as I still want to exposure to the company as I do believe it still has good long-term fundamentals. Trimming a stock simply allows me to take profit and redeploy the money elsewhere. Trimming a position is just about managing my portfolio risk.

When I fist bought my ownership stake in G4S just over a year ago, the shares were trading at it was trading at £1.88. Since then, the share price has increased substantially and it sits at £3.35 for a gain close to 80%. I thus took this opportunity to book some profit and take some money off the table so to speck. I sold 105 shares for a profit of £350. I still have exposure to G4S in the form of the 475 shares I still own. By selling 105 shares I have given up on £10 dividend income a year. But the way I look at it, if I invest £350 in a company like Imperial Brands, I can get close to £16 in dividend income. I can juice my dividend income by simply redeploying my G4S profit. Besides, my 475 shares in G4S still entitle me to £45 in dividend income from the security giant.

It may seem strange that as a buy and hold investor I am selling out of a position and trimming another. Isn’t the whole point of by and hold to let your winner run? Yes, but just because I am a buy and hold investor doesn’t mean that I should ignore valuation and portfolio risk.

One of the key arguments for buy and hold is that due to low trading activity, an investor is not wasting money or unnecessary dealing fees and thus is able to get above average returns. Since I have not spent a penny in transaction costs for the above two trades mentioned, I have kept costs to a minimum which doesn’t violate the tenants of buy and hold.

As an income focussed investor, this article wouldn’t be complete without focussing on the impact the above transactions would have on my total dividend income. Selling the entirely of my stake in Telefonica and 100 shares in G4S means that my total annual dividend income has reduced by £16. But with the fresh funds gained from the sales, I will be investing the money back into the market. I expect that the redeployment of these funds will ensure I receive a dividend of £23. Essentially, the moves to my portfolio mean that I have increased my dividend income by £7. Not bad if I say so myself.