I have run my real-money Dividend Growth Portfolio (DGP) since 2008. While the DGP is generally a buy-and-hold enterprise with little turnover, it is not a passive buy-and-ignore portfolio.

Indeed, one of the things I try to demonstrate through the DGP is thoughtful portfolio management.

The DGP’s business plan designates specific circumstances that call for possibly selling or trimming a position. As explained in a previous article, AT&T has checked three negative boxes, and it’s time to let it go.

  • Froze its dividend since early 2020.
  • Is spinning off a significant portion of its business, which will shrink the company.
  • The shrinkage, in turn, will force the company to cut its dividend next year.

Selling AT&T

I appreciate AT&T’s disclosure in giving its shareholders a one-year head’s-up on its future dividend cut. Prior to the liquidation described in this article, I owned 232 shares, and I had time to think things over. My decision was to sell it.

I chose Thursday, July 8, as the day to make the sale, because that was AT&T’s ex-dividend date for its Q3 dividend.

By waiting until then, I remained the owner of record on the company’s books until the record date of July 9. That means that I (not my buyer) will get the Q3 dividend even though I no longer own the shares when they pay the dividend on August 2.

(If you are unclear about important dividend dates such as the ex-dividend date and record date, please read DGI Lesson 1: What is a Dividend? Pertinent here: If the seller of a stock sells on the ex-dividend date, he or she gets the next dividend: the buyer does not.)

So on July 8, I sold my shares. Here is that transaction:

The sale brought $6500 cash into my account to be invested elsewhere.

Buying Stocks to Replace AT&T

Because AT&T had a depressed price resulting in a yield of more than 7%, I had no illusions about replacing all of its $482 income with different stocks. My goal was to replace over half of the income with stocks of higher quality and safer dividends.

My “shopping list” was discussed in the prior article cited earlier. Of the 11 stocks mentioned there, I eliminated a couple whose own Q3 ex-dividend dates had come and gone.

I did that because – so long as I’m replacing AT&T anyway – I want to “double dip” with the sale proceeds, taking advantage of a one-time opportunity made available by differences in ex-dividend dates.

After studying the other candidates, I decided to split my money two ways:

  • Build up a position I already own: Pinnacle West Capital (PNW)
  • Start a new position: AbbVie (ABBV)

Here are brief summaries of those companies.

I decided to split the proceeds one-third and two-thirds.

  • One-third to buy more PNW – $2183, enough to buy 26 shares.
  • Two-thirds to start the new position in ABBV – $4366, enough to buy 37 shares

When I was done, here is how the changes in my portfolio look, with AT&T sold off, Pinnacle West with more shares, and AbbVie added as a new position.

The portfolio stays at 29 positions. I spent all but $85 of the proceeds from AT&T on the two new stocks. That money goes into the kitty for the next dividend reinvestment later this month.

Portfolio Before and After

Here, from Simply Safe Dividends’ portfolio function, are before-and-after snapshots of three important portfolio metrics. Before selling:

After selling and replacing:

What did the transactions accomplish?

  1. I replaced an unsafe DG stock with two safer and faster-growing stocks. Now, no dividends are in the “unsafe” range, and the dark-green “safe” category rose from 80% to 89% of the portfolio’s dividends.
  2. The organic dividend growth rate across the portfolio rose from 5.8% to 6.7% per year. That is a 5-year look-back, not guaranteed for the future (of course).
  3. The DGP’s annual dividend payout run-rate went down $204 per year. Its yield on cost dropped from 11.1% to 10.7%.
  4. For 2021 only, I scored an “extra” quarterly dividend from AT&T ($121) as a sort of parting gift. I will also qualify for PNW’s and ABBV’s 3rd-quarter dividends, so I’m kind of double-dipping for one year only.

Looking Ahead

I’m sorry to lose the $482 income from AT&T, but it was not growing, and it was not safe. Indeed, it would have fallen by about 40% next year.

I was able to replace $278 of it immediately, and also to squeeze out an extra $121 for this year by holding onto AT&T until its Q3 ex-dividend date. So the impact on this year’s total dividends will be minimal.

The rest of the run-rate deficit has already been made up earlier in the year through the normal dynamics of DG investing. My annual run-rate was $4882 at the beginning of the year, and it is $5007 now. So it’s up 2.5% on the year even after letting AT&T go.

And the year is not over. Still ahead in 2021, I expect 11 more dividend increases and six more dividend reinvestments. By the end of the year, the dividend run-rate should recover back close to what it was, with much more safety and future growth now that AT&T is gone.

There are many who think the “new” AT&T – after divesting its media assets – will be a stronger “pure play” telecom company, making it similar to Verizon (VZ) in quality. If that turns out, and if it starts a new dividend-growth streak, I could see myself buying back into it at some point in the future once its dividend-growth bona fides are re-established.

Closing Thoughts

I always say to invest like you’re the CEO of your own business. Perhaps the most important decisions a business owner makes are about how to allocate capital.

That’s what I am doing here: Allocating capital. I am moving capital out of one stock that has become unreliable as a dividend-growth stock, and putting it into two stocks with much better prospects.

Long-term, that strikes me as the right move to advance my primary goal of generating reliable, growing income over many years.

For more insight into my reasons for selling AT&T, see this article: Dividend Growth Stock of the Month for June 2021 – Special Edition on AT&T (T)

For more insight into the two stocks that I bought, see these articles:

Dividend Growth Stock of the Month for July, 2020: Pinnacle West (PNW)

I Just Bought More Pinnacle West Capital (PNW) for My Dividend Growth Portfolio – March 2021

Dividend Growth Stock of the Month for January, 2021: AbbVie (ABBV)

PNW and ABBV are also positions in Mike Nadel’s Income Builder Portfolio, and he has written articles about each one. Links to those articles can be found at the link given.

Get More Great Stock Ideas for 2021 from My Dividend Growth eBook

Both PNW and ABBV are featured in my e-book, Top 30 Dividend Growth Stocks for 2021: A Sensible Guide to Dividend Growth Investing.

In addition to the 30 featured stocks, the e-book contains what I modestly think is the best investment guide for dividend-growth investors, bringing you more than 200 pages about the strategy and tactics.

Please click on HERE for more information. As a gift, I will send you a free booklet that explains compounding. Even if you don’t purchase the book, sign up for my free newsletter. I email it monthly with helpful information for dividend growth investors along with links to my most recent articles.

— Dave Van Knapp

This article first appeared on Dividends & Income

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