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What's the best stop loss strategy for your dividend paying shares?

by , 22 October 2014

Running a stop loss is one of the easiest ways for investors to keep a lid on their losses when investing in shares. Trailing stop losses also have their benefits as they lock in profits when a share price rises.

But what should you do when it comes to stop losses with your dividend paying shares? After all, you bought them for their dividend payments, not capital appreciation.

Here's one way you can manage the downside with your dividend paying shares…


Perhaps your dividend paying shares need a different risk management strategy


When you invest in shares for their dividend payments, your mandate is different from the shares you buy for capital gain.

If you’re investing in a share for its dividends, that’s your primary reason for investing. Any capital gain on top of that is a bonus.

On the other hand, if you’re investing in a share in the hope the share price will rise, capital gain is your primary reason for investing.

With this in mind, running a trailing stop loss on your dividend paying shares isn’t the wisest decision.

Let’s say you run a 25% trailing stop loss on your dividend paying shares. The share price rises and then falls back to your original buy in price. If it hits your trailing stop loss in the process, you need to sell it.

And that’s despite trading at the same dividend yield that made you invest in the share in the first place, Dr David Eifrig in Income Intelligence explains.


Use hard stop losses with your dividend paying shares


So that’s why approaching stop losses on your dividend paying shares should be a bit different. Instead of running a trailing stop loss, set a hard stop loss when you buy the share. For instance, 20% below your buy in price.

If you’re investing for dividends, it doesn’t makes sense to sell a share that pulls back slightly. The share price isn’t the reason for you buying the share in the first place.

Of course, if the company starts to drop its dividend payments or ceases paying them altogether, that’s a different story. If this happens, the share no longer offers the reason you bought it in the first place.

So there you have it, the best stop loss strategy for your dividend paying shares.

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