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How dividends (and options) protect my portfolio

It is well known to all dividend investors that dividend paying stocks outperform non-dividend payers big way over time. Many studies also proved that dividends generally contributed 50% to overall market returns.

Yet many times people need a proof in real life in order to believe it – myself included. In the past I under-estimated dividends. They weren’t appealing to me at all. I hoped for a big run – a home run with growth stocks.

(MORE: Serious Motivation for Buy and Hold Investors: Bigger Pockets Podcast #6)

Of course it never happened.

It is also proved that dividend paying companies outperform nonpaying companies in EPS. The reason is that companies which pay dividends are very sober in how they use their cash. They give some cash away and must operate with what’s left. Time proved that their R&D expenses were a lot better and profitable to those companies which weren’t restrained by paying out the dividends.

I started investing in dividend stocks about a year and a half ago. So my dividend portfolio is quite young compared to my fellow investors and yet it started showing the power of dividends.

(MORE: Do You Tend to Notice the Companies You Own?)

I keep track of every dividend I receive as well as every option premium I get when I sell puts or calls. When I receive a dividend or an option premium I assign it to the stock which paid it. Then I use that income towards my cost basis.

Here is a spreadsheet I use to do the job:

Click to enlarge

Every dividend received is added to my cost basis which is then decreased. I do the same with my options income as I wrote in my previous post “How to buy stocks cheap in today’s expensive market” to lower my cost basis.

(MORE: Stocks for the (Really) Long Term)

Since my portfolio is still a “young dividend achiever” the results are not yet that evident but the results of dividend power is already shaping out. These days markets are falling due to a fear of too good economic results to be true (can you see how crazy the markets are by the way?) so the FED may taper (and thus all the great economic results collapse) so investors run to exit.

(MORE: Tweaking my dividend growth strategy in my taxable account)

When I check my trading account with TD Ameritrade, sometimes all my holdings are all in red. And such a quick look at those numbers can scare a novice investor to death and even push you into emotional selling. Check it out:

TD Account
Click to enlarge

As you can see, the day gain is scary – all red and total gains are also pointing to mediocre results. But these results do not contain income I have received in dividends and options. When I add that income the results look like this:

Td Account

Compare the results with dividends and options premium received. The picture is a lot better and very optimistic. At least to me. I can see that investing into dividend paying stocks I can protect my portfolio and the decline in markets is not something you should fear. It is now my friend because I can be buying stocks cheap. And that would add to this dividend effect as a portfolio shield.

(MORE: Do It Yourself? How I Learned The Value of DIY)

And this is only one reason why I fell in love with dividends! Wait when the compounding effect of reinvested dividends starts gaining speed. The portfolio will be growing faster than ever before.

What about you, do you have a similar experience seeing your stocks down on day-to-day basis while in fact they are up? Do you track or edit cost basis according to received dividends?

18 responses to “How dividends (and options) protect my portfolio”

  1. […] into Stocks – Hello Suckers! writes How dividends (and options) protect my portfolio – Dividends and premiums from put selling when added to your cost basis can significantly protect […]

  2. Ben says:

    Nice work on your spreadsheet. That’s comprehensive. I keep track of my investments in a similar fashion.

  3. It is because of your blog that I have gotten into dividend investing in the first place. Even though the performance of the stock may lag behind an aggressive growth stock, I’m already seeing how the dividends can more than make up for the difference. Thanks for helping me see the light.

  4. Evan says:

    Love the spreadsheet! Every once in a while I’ll figure out how much money I have received on a particular equity:


    Do you update your spreadsheet yourself? Does it connect to google finance?

    • Martin says:

      Yes it does connect to Google finance. All orange fields are updated automatically, bluish manually. I just fill the purchases and income under the heather manually. The rest is calculated upon that.

  5. Integrator says:

    The other way to think about the dividends as they come in is the extent to which they have disrisked your initial investment. As cumulative dividends received exceed 25%, then 50% of portfolio value, you at risk amount becomes negligible the longer your holding period. Falling prices therefore have negligible impact on a dividend holding, as far as your “actual loss”

  6. Life In Center says:

    Yeah dividends do bring me relief and honestly if companies weren’t giving out dividends I would not be an investor. I don’t really care about how much there is value in the portfolio or what the % says. I’m more interested in the annual dividend income. Everytime I get it higher every time I get happier :)

    When I get better at investing I am going to look more closely on comission costs and other issues, but right now I am just happy to see the annual dividend rise every month with additional purchases.

    • Martin says:

      I do the same. At least I try not to look at the value of the portfolio that much, but the income I have. The balance is the secondary metric. And if I add dividends to my cost basis the picture is a lot better.

  7. Hi Martin,

    I learned to look only very rarely into the depot.

    Not more than once a week!

    In my depot are also a few values with a big loss!

    But I trust in the dividend payments and see in the fallen courses good buying courses that will bring me a high dividend yield me the future.

    I´m therefore delighted when prices fall. (reversed think …)



  8. […] How you can protect your portfolio with dividends and options @ Hello […]

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