Addition by subtraction

Wednesday’s steps: 3 sales and one biggish purchase

Wednesday was all about addition by subtraction.

As a dividend-growth investor with a 20-30 year horizon, the concept of selling doesn’t cross my mind all too often. In a perfect world, I’d buy well-established companies with great track records of growing their businesses (and dividends) with plenty of room to grow in the future. I’d by low, never sell and ride the wave of momentum created by capital appreciation and compound interest.

The problem is, though, we don’t live in a perfect world. Things happen … like the recent merger between Dow and DuPont. The companies combined to form DowDuPont, Inc., which isn’t necessarily a bad thing for shareholders, but it created a bit of a problem for me.

Why? I’m glad you asked. If you read my blog at all, you know I’m all about dividends. I love the cash flow they create and am, for lack of a better term, addicted to them. It’s a healthy addiction, but an addiction nonetheless. I’ve earned more than $200 worth of ’em since the beginning of the year.

Now, the problem with the Dow-DuPont merger, from my perspective, is the new company might not pay a dividend. I wouldn’t be surprised if it decided to pay one, but I also wouldn’t be shocked if it didn’t. Either way, I’m sure the new company has a lot going on at the moment.

I didn’t want to wait to find out, though.

The subtraction part of the equation

I’ve been a Dow investor for most of my march toward $1,000,000. It was one of my first handful of purchases and, considering I owned six shares of the chemical company, one of my biggest positions. It had a nice yield, well over 3%, and was producing $2.76 of dividend income each quarter.

When the merger wrapped up, my six shares of Dow Chemical (DOW) became six shares of DowDuPont, Inc. (DWDP). The new position was worth the same amount as the old one, so I didn’t lose any money, but the key difference was this: it didn’t produce any dividend income.

I know, right?

I couldn’t have that … DWDP had to go. I sold my position for $390.08, collecting a profit of about $30. I also sold a share of PennyMac Mortgage Investment Trust (PMT) and Starwood Property Trust, Inc. (STWD) for a combined $39.15. I’ll tell you why in a moment.

Now, here’s the addition part of the equation

With the $429.23 of purchasing power freed up from the sales, I had one specific goal: make up the lost dividend income.

Well, I did that and then some, scooping up 16 shares of New Residential Investment Corp. (NRZ) for $262.06 ($16.38/share).

The company is a mortgage REIT, just like PMT and STWD, which is exactly why I cut those two loose. Neither offers the yield of NRZ and, among the three, NRZ has the lowest payout ratio. I don’t see NRZ as a company I can count on for dividend growth, but I see it as a steady income producer for many years to come. It’s a riskier investment than pretty much all the other companies in my portfolio, but the reward – an annualized dividend of $2 – is worth it in my opinion. It’s not like it’s my biggest holding or anything.

For me, it’s all about making my money work for me. The $429.23 that was invested in DOW, PMT and STWD was earning me $14.84 in forward annual income. The 16 shares of NRZ, which I scooped up for considerably less than the amount generated from the sales, will produce $32 in forward annual dividend income.

So, to clarify, I bought $262.06 worth of stock producing $17.16 more in forward annual dividend income (more than double) than $429.23 did.

Is NRZ a riskier investment than DOW? Sure, probably. But the reward is far greater and I have an extra $167.17 to play with.

I think it was a pretty good deal. Then again, what the heck do I know?

March on!