I need some help from the mathmeticians

OK... What I need is a formula, for rolling out of one investment, and into another while maintaining dividend yield.

 

Example. Lets say I have a cost basis of $55,000 for stock A. It pays me an effective yield of 10%/yr cash. I have also enjoyed a 10% Captial gain so my market value is $55,000.

 

 

I want to sell some of that stock and buy another stock B that pays 5% yield. My reasons for doing this is to bank some of the capital gains from riskier stock A, and putting them into the presumably less risky Stock B.

 

Is there a formula (or series of calculations) that can tell me how much (in dollars) I should sell of stock A and buy of stock B while maintaining my overall 10% yield? Something that I could set up in EXCEL with Market value, and yield variables would be AWESOME!

 

FOR NOW, lets ignore taxation issues.

Bump.

I created an impossible problem... Not enough gain and too small a yield... fcuk

Am I reading this properly, to sell off X% of A, you need to buy 2X% of B for the same $ net return. Selling $25k of A means buying $50k of B for the same return.

 

Or did I completely miss a key point here?

OK... What I need is a formula, for rolling out of one investment, and into another while maintaining dividend yield.

 

Example. Lets say I have a cost basis of $55,000 for stock A. It pays me an effective yield of 10%/yr cash. I have also enjoyed a 10% Captial gain so my market value is $55,000.

 

 

I want to sell some of that stock and buy another stock B that pays 5% yield. My reasons for doing this is to bank some of the capital gains from riskier stock A, and putting them into the presumably less risky Stock B.

 

Is there a formula (or series of calculations) that can tell me how much (in dollars) I should sell of stock A and buy of stock B while maintaining my overall 10% yield? Something that I could set up in EXCEL with Market value, and yield variables would be AWESOME!

 

FOR NOW, lets ignore taxation issues.

 

Please clarify two things:

1. Is the basis $55,000? Or is the market value $55,000?

2. When you say an overall yield of 10%, are you basing that yield on the original basis? If not, the only way to maintain a 10% yield based on the market value is to keep all of your funds in the investment yielding 10%.

You need to sell 2/3 or 66.6% of stock A and use the proceeds to purchase stock B.

I'm guessing you mean that you want to preserve the same 10% yield on the initial principal and not overall. You can't be yielding 10% if you own stocks with less than a 10% yield. It's impossible. I'm assuming you mean that if you start with $55000, you want to yield $5500 that year in dividends, regardless of whether your account value increases.

 

In that case, you could re-balance your position after each dividend you receive from Stock A or if you've made a large capital gain from Stock A. Take those dividends and gains and buy Stock B while maintaining the same $55000 in Stock A. While this isn't exactly what you want, the difference would be very small since you're talking about offsetting Stock A with 5% yield OF the 10% yield. It's not very substantial.

 

This is closer to what you want, but it is just off the top of my head. You could use something like the following to re-balance quarterly. It does not take into account a change in yield due to stock price increases though.

 

X = Value of Stock A

Y = Value of Stock B

Zo = Initial account balance at beginning of the year

Zt = Current account value

Zo(.025) is the quarterly gain of a 10% yield on the initial account balance.

X(.025) is the quarterly gain of a 10% yield coming from Stock A.

.0125 is the quarterly gain of a 5% yield coming from Stock B.

You can change any of those to value based on what the two stocks you're interested in yield.

 

Plot: Y = [Zo(.025) - X(.025)] / (.0125) where X >= (2*Zo) - Zt

 

There are an infinite number of solutions to this equation. Select a dollar amount of Stock A for X and it will tell you Y, which is how much of Stock B you'd need to have. Keep in mind the bounds of X since selecting too low a value for X would require an amount of Y that you couldn't afford to by.

 

You could do this balancing whenever you want, though it may not be cost effective or useful to do it like everyday.

 

There is probably a better way to model this, but that's what I came up with real quick. Of course you won't be able to match it exactly because it's unlikely that the values are integer multiples of of the stock prices.

You need to sell 2/3 or 66.6% of stock A and use the proceeds to purchase stock B.

 

That's going to net you a 6.x% return.

Am I reading this properly, to sell off X% of A, you need to buy 2X% of B for the same $ net return. Selling $25k of A means buying $50k of B for the same return.

 

Or did I completely miss a key point here?

 

Youre right.... The figures I used dont work.... the dividend is halved, but the capital appreciation is only 10%.... I think it would work mathematically if the Cap appreciation was like 30% and the dividend dropped to 8% or so....

 

But I still cant think of how to formulate the ratio to make it easy....

I'm guessing you mean that you want to preserve the same 10% yield on the initial principal and not overall. You can't be yielding 10% if you own stocks with less than a 10% yield. It's impossible.

 

 

I dont care about the yield % remaining the same. Im concerned with the actual dividend remaining the same. In this case it would be selling some of stock A, buying some of stock B and still bringing in a net of $5000/ year (Stock A's yield) from both together. To make that possible Stock Bs yield has to be higher than the original example and stock As appreciation has to be larger as well...

 

This is one of those things that came to me in the shower....And I couldnt figure out how to set up the equation... When I asked, I figured it was an easy question, but it isnt....

That's going to net you a 6.x% return.

 

Yep.

Please clarify two things:

1. Is the basis $55,000? Or is the market value $55,000?

2. When you say an overall yield of 10%, are you basing that yield on the original basis? If not, the only way to maintain a 10% yield based on the market value is to keep all of your funds in the investment yielding 10%.

 

Cost basis 50K and yield based on that (yield drops as price rises)

That's going to net you a 6.x% return.

 

I guess I misunderstood the question.

I guess I misunderstood the question.

 

Its my fault... I created an unsolvable problem... The dividend reduction of the second stock has to be in direct correlation to the capitol gain of the first (or less) in order for you to have enough cash left over to make it work.

 

Example... If the dividend drops 25%, you have to have a 25% cap gain in order to afford it and make it work...