Investors always look for the perfect formula that would enable them to purchase the best stocks at bargain prices, which would provide large capital gains over time and an increasing stream of dividend gains. One could line up one or several indicators in order to reach a buy decision. Selling a stock however, is what could ultimately determine whether you succeed or fail in the long run.
As a buy and hold dividend investor, I try to pick stocks that trade at reasonable levels, and then dollar cost average my way into the position. My holding period is forever, as long as certain prerequisites are met. I don’t set target prices at which to exit, as most often than not the market is either going to blast through this level and never look back. Furthermore setting target prices at which to sell at would imply that I know when to sell high and that this “high” price will not be reached again the foreseeable future.
There are three conditions that could make me sell the stock I am holding.
- Company is bought out by another company for cash or stock or it is taken private
- The stock takes a very high portion of my portfolio, relative to other positions
- Company slashes or eliminates its dividend.
- Company is overvalued relative to future growth prospects and current yield.
I will focus my attention on selling when a stock that I own cuts or suspends its dividends. One of the main reasons why I would enter into a dividend stock is because I believe that the dividend would be increased over time, bringing my yield on cost upward to a comfortable double digit level. If a company maintains its dividend payment, without cutting it, I would still hold on to the stock. When the dividend is cut or suspended however, my goal of generating an increasing stream of dividend income is no longer valid. Thus, selling my whole position in this company is the best decision to make. Bank of America (BAC), Citigroup (C) and General Motors (GM) are three good examples that selling right after a dividend cut is a good strategy.
Next week I will discuss why I disagree with the notion that selling after a dividend cut is an example of buy high sell low.
Relevant Articles:
- What Dividend Growth Investing is all about?
- Best Dividends Stocks for the Long Run
- Dividends and The Great Depression
- Dividend Portfolio Investing for monthly income
This article was included in the Carnival of Wealth, Slump Busted Edition
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If you believed a dividend cut was inevitable, it would be better to sell well ahead of the announcement. By the time the cut's announced, chances are the stock's already fallen quite a bit.
ReplyDeleteOf course, once a cut is announced, there's still a whole lot of downside left in the stock. Your examples illustrate that point very well.
And if you wanted to get super fancy, you could write in the money covered calls on the offending stock, giving you protection to the downside and recouping/replacing the lost dividend stream with the option premium.
But, in the end, selling the %#$#@# thing is probably the best course.
I rather get rid of the stock prior to a dividend cut. If both sales and earnings are slowing down and the payout ratio starts to increase dangerously, I better be safe than sorry and pull the trigger.
ReplyDeleteFor the past 3 years, I didn't have to sell any of my dividend stocks. So far, they all have been increasing their dividend instead :-)
The tax consideration is very important when attempting to rebalance your portfolio. Rebalancing is the right move in general, but better in a Roth IRA.
ReplyDeleteI generally agree with all four selling conditions. However, with respect to the second condition, I'm always hesitant to sell a stock that is taking a too large portion of my portfolio if the reason is a steady rise of its price.
ReplyDeleteAt some point, if you bought a great company at good price, the stock will most likely rise. Maybe faster and higher than your other stocks. If you add split and further increases in stock price, your small initial investment might become pretty large. I have Abbott in mind.
Still, if the prospects of the company remain good, I think I would keep the whole stake.
Otherwise, I would have to reinvest the proceeds of my sale into another stock I probably know less.
But in the end, it remains a personal judgement call.