One More Home Run!

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Microsoft Corporation (NASDAQ:MSFT) is trading 14% above my fair value estimate of $53.28. The stock has a streak of 15 years of dividend increases and an impressive 10-year dividend growth rate of 15%. Microsoft is one of only two companies with a AAA credit rating. (Johnson & Johnson (NYSE:JNJ) is the other company).

Home run stocks present dividend growth investors with some (pleasant) challenges. Are the stocks overvalued or are they suitable for further investment? Is it OK to increase your average cost basis by buying more shares at much higher prices? What are the implications of reducing your average YoC when you buy more shares at lower yields?

I mentioned before that Chowder, a Seeking Alpha contributor, advocates buying shares of a great dividend growth stock that continues to experience higher earnings expectations, even as the share price rises to meet fair value. He calls the strategy dollar-cost averaging up. He argues that fair value estimates will increase with higher earnings expectations and that the stock price will follow. The strong often get stronger.

My sixth home run stock, MAIN, is one example where I’ve continued to add shares at higher prices:

The chart is a little outdated (September 5), but illustrates the point. It shows five occasions when I bought shares of MAIN. My average cost basis is $21.71 and my average YoC is 10.2%. With MAIN trading at $34.17 per share, the stock currently yields 6.5%.

Returning to the earlier questions, should I buy more shares of a home run stock even if doing so would increase my average cost basis and reduce my average YoC? Assuming the stock trades at or below fair value, I don’t see any reason to shy away from buying more shares. In fact, I like the idea of dollar-cost averaging up, especially if I get to increase my investment in great dividend growth stocks that are experiencing higher earnings expectations.

Note: FerdiS manages and writes about DivGro, his portfolio of dividend growth stocks created in January 2013. Please visit divgro.blogspot.com.

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