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What Should Income Investors Do With Their Unrealised Stock Price Gains?

Recently, we have received a lot of emails asking us for advice on what income investors should do with the unrealised stock price appreciation profits that are sitting in investors’ brokerage accounts. Our best dividend stocks have generated stock-price-appreciation-related profits since they were recommended, and in some investors’ cases stand at triple digits.

For example, Digital Realty Trust (DLR ) was added to the Best Dividend Stocks list on 04/11/2014 and has a rating of 3.6. Though this stock doesn’t feature on the list anymore, it is still rated at 3.6, and to date, the stock price has given an over 95% gain.

Low Dividend Return, High Unrealised Return

Continuing with our example of DLR being added to the list on 04/11/2014 at a price of $52.88 – today the price stands at $103.24, which equates to a return of 95%. Consider an investor who bought 1,000 shares at $52.88, and invested $52,880. Since 04/11/2014, the following has been the company’s dividend payout schedule:

An investor who owned 1,000 shares of DLR would have received a total of $8.53 per share to today, which equals a dividend income of $8,530. So, an investment of $52,880 generated a 16% return through dividends over a 3-year period.

During the same period, the stock price rose 95%, but returns have remained unrealised.

The Strategy

Let’s assume that within a month the price of the share reaches $60. That means he will make {($60 – $52.88)*1,000} = $7,120 in unrealised profit. At the latest share price of $60, he can sell 118.66 shares (or 118 shares for simplicity’s sake) and get a credit of $7,120.

He will now own only 882 shares. As a few months go by, if the stock price goes back down to $52.88, he can use the $7,120 to purchase 134 shares of the same stock.

To recap: previously he owned 1,000 shares, then sold 118 shares at $60, which left him with only 882 shares. As the share price fell back to $52.88, he bought 134 shares with the credit he received. He now owns 1,016 shares.

High Dividend Return, Low Unrealised Return

Previously, he had 1,000 shares earning dividend income, now he has 1,016 shares earning dividend income. If you refer back to the dividend payout history of DLR after he purchased stock, he could have made 1,016 shares times $8.53 (dividend income), which equals $8,666 versus $8,530 – a gain of 16.38% over 16% from the previous strategy.

The Bottom Line

This extra gain seems minimal at first. But, if an investor keeps selling shares equal to the gain he makes on a continuous basis, he will eventually have more shares earning dividend income, which is the aim of an income investor – rather than sitting on a pile of unrealised gains.