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Why I Won’t Sell Dividend Stocks Even After a 1000% Gain

Investing for the long term continues to pay off

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As a dividend investor, I do monitor the positions I have regularly. However, from a psychological perspective I have found that a daily monitoring of my portfolio for major events might increase my chances of doing something stupid such as trading too often. In reality, as a part-owner of a business, there are not many events that would happen every day, which would materially affect the business. Again, this is more of a nuanced approach as opposed to a black and white strategy. I do want to see improving fundamentals over time, as well as catalysts that would bring more income.

For example, Coca-Cola (NYSE:KO) is a brand whose products would likely continue to quench the thirst of consumers, who would only drink the specific products sold by the company. I would never for example drink Pepsi, although I know some individuals who would always drink Pepsi and hate Coke. There are hundreds of millions of consumers who will be entering the middle class in developing markets in Asia, Latin America or Eastern Europe. If people in India and China eventually consume as many servings of Coke per year as Americans do, Coca-Cola will have a bright future ahead.

Back 1988, Warren Buffett began accumulating shares in Coca-Cola for his holding company Berkshire Hathaway (BRK.A,BRK.B). Currently, Berkshire owns 400 million shares at a cost of $3.2475 per share. Berkshire’s stake has increased its value over 11 times over the past 25 years.

At the same time, the company has been more valuable, as it has managed to increase profits and dividends. The stock price was overvalued in 1998, selling as high as $45 per share, and having a P/E of 48 by year end and an yield of 0.80%. EPS for 1998 were 71 cents per share. Buffett did not sell his stake, and earnings per share rose to $1.97 per share by 2012. The issue was that Coca-Cola was consistently trading above 20 times earnings between 1992 -1998. Since 1995, Coca-Cola traded at a P/E of over 30 times earnings. The stock didn’t become attractively valued until 2006. In hindsight, it’s easy to tell when to buy and sell. In reality, it ain’t so. Berkshire Hathaway currently is sitting on more than a 1000% gain in Coca-Cola. Chances are that it would keep on holding the stock, and since Coca-Cola regularly repurchases shares, Berkshire’s stake in the company will keep increasing over time.

Buffett did sell another one of his holdings, McDonald’s (NYSE:MCD) in 1999, when the stock traded around $35 to $40 per share. The stock fell as low as $12 per share in 2003, before reaching $100 by 2011. The dividend increased each year during the period, although McDonald’s did have some operational issues in 2002 to 2003. In effect, Buffett missed out on this great investment idea.

Full Disclosure: Long CVX, COP, MCD, KO, JNJ, PEP,

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