Buying Strategies III: Using Short-term Trades to Turbo-charge your Yield

In my last post I covered doubling up and doubling down as a strategy for buying high quality dividend aristocrats. Today’s post covers a more advanced and risker trading strategy that may be suitable for some Child Millionaire investors looking to boost their yield by improving the price they paid for a given share.

 

On 18 April 2011, I purchased 250 shares of Standard Life (LSE: SL.) for Mia’s Portfolio. The share price was 211.202p including the dealing costs for a total investment of £528.01. I currently hold Mia’s portfolio within my Individual Savings Account (ISA) [a tax-free investment account available to UK residents] and the 250 shares were purchased as part of a larger lot of 1,515 shares of which 250 were for Mia and 1,265 shares were for my own portfolio.

 

I have no idea where the SL share price is headed in the short-term but I know it’s a high quality dividend machine worth owning long-term. On 5 October 2011, well past the share price low of 172p on 8 August, I bought 5,000 shares at 194.197p including dealing costs and stamp duty for a total investment of £9,709.85. This was intended as a large short-term holding for the purpose of lowering my overall price for the smaller number of SL shares that I want to hold long-term. The next day the price had risen and I sold 5,000 shares for 199.83p including dealing costs.

 

So at the end of the day on 6 October 2011, I was back to having 1,515 shares – 250 for Mia and 1,265 for my portfolio. On the trade I pocketed £281.66 in tax-free cash for ten minutes of work, but this is incidental to the main purpose which was to lower my overall ‘book value’ i.e. the price I paid for the SL shares. Here’s how it worked:

 

18 April 2011 bought 1,515 shares at 211.202p = £3,199.71 [including dealing costs]

5 October 2011 bought 5,000 shares at 194.197p = £9,709.85 [including dealing costs]

 

So at the end of 5 October I held 6,515 SL shares with a total cost of £12,909.56 for an average price of 198.151p per share.

 

On 6 October I then sold 5,000 shares at a price of 199.83p [including dealing costs] for a total of £9,991.50. The difference between the £9,991.50 I received on the sale and the £9,709.85 I paid came out to £281.65 which was a profit on the trade. For the purposes of the long term investment in SL, the 1,515 shares that I continue to hold now have an average book value – i.e. cost – of 198.151p rather than the 211.202p I originally paid on 18 April 2011. So by using a sort of turbo-charged ‘doubling down’ tactic overall I’ve lowered the cost of our positions in SL by 13.051p per share which is £32.63 saved for Mia (£0.13051 X 250 shares) and £165.10 for me (£0.13051 X 1265 shares).

 

Going forward this means that the yield on the shares in Mia’s portfolio has now increased from 6.16% (trailing dividend of 13p / 211.202p X 100% = 6.16%) to 6.56% (trailing dividend of 13p / 198.151p X 100% = 6.56%) and her portfolio has £32.63 in additional cash to be deployed in future investments.

 

Obviously this worked for me because of a number of factors: I had sufficient spare cash in my investment account that could be used for a short term trade; Mia’s SL holding was amalgamated with my holding so the dealing costs were averaged across more shares; and crucially, the share price of SL rose the following day and I was able to get out of the trade quickly before the market turned down and the plan backfired.

 

As it turns out had I held on to the shares a bit longer the price of SL hit 224p on 27 October, which would resulted in a much larger windfall. Mind you, by mid-November the share price was again dropping over euro zone worries, hitting 185.10p on 25 November, which would have put me underwater. The point being that I didn’t know where the share price would go, thought I did have the momentum of the overall market behind my trade, and with nearly £10,000 on the line I wanted to get in and out of the position quickly.

 

A few key points. The above example is an advanced strategy that blends long-term investment objectives with a short-term trading strategy that I do not recommend for the Child Millionaire portfolio or any other portfolio unless you are a seasoned investor and you understand and accept the risks. What it does illustrate though is the basic principle that if you purchase shares in a single company at two different times and two different prices you can manipulate your book cost. If the market moves favourably you can lower your book cost, pocket a small immediate profit and boost your overall yield and long-term return. If the market moves against you, then you may well be stuck with more shares of a single company than you want thus dramatically increasing the risk to your portfolio.

 

 

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