Most articles on dividend investing focus on buying the best dividend stocks, reinvesting dividends and living happily ever after. They dazzle you with elaborate analysis and entry criteria, yet spend little in analyzing factors that cause one to sell.
In a long term dividend portfolio, I expect that there will be lots of change occurring over time in both company’s business prospects and portfolio composition triggered by the business environment changes. As a result even if you picked the best stock in the world at the best price, you might still need to consider selling for one reason or another.
I have tried addressing this issue in previous articles, where I identified three reasons where I will make me sell. The three reasons include dividend cuts, company being bought out for cash or position being too high relative to other portfolio components. The only automatic rule is selling after a dividend cut or if I get bought out for cash when a stock is acquired. In the process of my portfolio reviews, I have uncovered another guideline that would recommend selling a certain type of companies on a stock per stock basis.
In the past year, I have sold three companies, which have kept growing their distributions. I then replaced these with companies which had better earnings and growth prospects.
In the middle of 2012, I replaced most of my Con Edison (ED) shares with units of ONEOK Partners (OKS). Con Edison was growing earnings and distributions very slowly, and looked overvalued based on the low future expected growth in earnings. ONEOK Partners on the other hand had much better growth prospects and a higher yield. The more time I spent researching the industry, the more I view utilities as poor long-term dividend growth stocks with their tendency to pay high current yields but to cut distributions every once in a while.
At the very end of 2012, I sold my position in Exxon-Mobil (XOM) and purchased shares in ConocoPhillips (COP). Exxon-Mobil has one of the stingiest dividend payouts in the oil and gas industry, and it tends to prefer stock buybacks to cash distributions. ConocoPhillips on the other hand has a better payout, and looked like a better value. I wanted to maintain my energy exposure, which is why I bought shares of ConocoPhillips.
The third trade I recently made was selling my position in Cincinnati Financial (CINF) and purchasing shares in five Canadian banks. These banks included Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM) and Royal Bank of Canada (RY). Cincinnati Financial had raised distributions at a very slow rate over the past five years, had a high dividend payout ratio and earnings were not expected to grow by much in the foreseeable future. The yield was high due to indiscriminate yield chasing by yield hungry investors, and the P/E ratio is close to 18. With the funds received, I purchased the five Canadian banks mentioned above in order to maintain exposure to financials in my portfolio. In addition, they had slightly higher yields on average, and better earnings and growth prospects than Cincinnati Financial.
Another trade I have made includes replacing Universal (UVV) with Phillip Morris International (PM) stock. Both companies have similar yields, although Universal has a lower P/E ratio relative to PMI. However, I view PMI’s growth prospects to be much brighter than those for Universal. In my last analysis of Universal, I realized that the company might experience declines in earnings going forward.
In general, I reviewed each company’s prospects on a company per company basis before making a decision to sell. I viewed low growth in earnings, dividends and poor near-term growth prospects as negatives. I then tried to look for a replacement in the same sector, or a close substitute.
Full Disclosure: Long PM, BMO, CM, BNS, RY, TD, COP, OKS, ED
- When to sell my dividend stocks?
- Dividend Cuts - the worst nightmare for dividend investors
- Why I am replacing ConEdison (ED) with ONEOK Partners
- Dividend Investors – Do not forget about total returns
- Exxon Mobil’s Stingy Dividend Payout
The goal of every dividend investor is to generate dividend income that is larger than their annual expenses. This coveted goal is called th...
Dividend growth stocks are the gift that keeps on giving . I like the fact that most of the work in selecting good dividend growth stocks is...
I have been a dividend growth investor for over 7-8 years now. The reason why I have somewhere between 85% - 90% of my networth in dividend ...
I have received quite a few emails recently, asking me how I manage my dividend portfolio . In general, I focus on several things that I b...
I love it when the stock market goes on sale, like it has been so far in the past two - three weeks. For aspiring dividend growth investors,...
How do you define success? To me, success is the freedom to do my own thing, and the ability to reach my goals. Given the fact that I am a f...
One of the biggest sins in investing, is investing money without a clear plan or strategy to accomplish specific goals . This investing sin...
I am a fan of diversification as a tool to reduce risk. I diversify by buying at least 30 – 40 securities, representative of as many sectors...
There are many risks to investing . One of the major risks that could ruin a portfolio’s chances of generating adequate dividends are p...
Before I begin my message, I wanted to wish all my readers a Happy 4th of July. And I wanted to thank all of those military members for keep...