As a long-term buy-and-hold investor, most of my evaluation efforts are aimed at determining when to buy a stock. However, sometimes selling a stock is the right thing to do, and we need to be adept at identifying those times.
I have stated on numerous occasions that I have one hard and fast sell rule for my individual dividend stocks: When an individual stock held as a dividend investment lowers its dividend, immediately sell it.
For me and my stocks held as dividend investments, there are other times it makes sense to sell. Consider these:
Flat Dividend Leading to Poor Dividend Fundamentals
When a company fails to raise its dividend, dividend fundamentals can quickly deteriorate if the stock's yield is low. It is easier to be patient when the yield is higher and the stock is still earning its way. However, as dividend growth investors, ultimately we expect our dividends to grow: Below are several stocks that failed to raise their dividends at the expected time:
- Courier Corporation (CRRC) | Yield: 12.1% | Div. Flat Since: 11/2008
- Meridian Bioscience Inc. (VIVO) | Yield: 4.5% | Div. Flat Since: 01/2010
- Weyco Group Inc. (WEYS) | Yield: 2.8% | Div. Flat Since: 05/2010
- CenturyLink, Inc. (CTL) | Yield: 8.8% | Div. Flat Since: 03/2010
- Universal Health (UHT) | Yield: 7.3% | Div. Flat Since: 06/2010
- Integrys Energy Group, Inc. (TEG) | Yield: 5.6% | Div. Flat Since: 02/2009
Significant Price Run-up Distorting Dividend Fundamentals
When you buy a dividend stock at a depressed level it will eventually return to its norm. However, at its normal level the dividend fundamentals could be so bad that you would be better off putting the money to work somewhere else.
For this evaluation, my primary indicator is the NPV MMA Differential. When this metric goes negative, it in effect is saying you are better off putting the into a fixed income investment for the next 20 years.
When this occurs I look for a way to exit the position and retrieve my original investment, leaving the portion attributable to capital appreciation. Examples of stocks with these characteristics are:
- Automatic Data Processing, Inc. (ADP) | Yield: 2.9% | NPV MMA Diff: (79)
- V.F. Corporation (VFC) | Yield: 1.9% | NPV MMA Diff: (261)
- The Sherwin-Williams Company (SHW) | Yield: 1.8% | NPV MMA Diff: (347)
- Archer Daniels Midland Company (ADM) | Yield: 2.5% | NPV MMA Diff: (78)
- Caterpillar Inc. (CAT) | Yield: 2.4% | NPV MMA Diff: (205)
The same situation can occur when a stock rockets up on speculation or a planned buyout. In this case you have to determine if there are better investments at the stock's current yield and if you are willing to risk a drop in the stock's price.
A prime example of this was the recent announcement that Harleysville (HGIC) would merge with Nationwide. Stockholders of HGIC would receive $60.00 per share in cash. HGIC's price spiked over 85% in one day and its yield dropped to under 3%. At the time, there were plenty of quality stocks yielding more than 3%.
Historical Performance Is not Indicative of Expected Results
Sometimes historical results are indicating the stock is a good investment, but something just doesn't seem right. In situations like this there is probably a reason for the uneasiness and it is in our best interest to understand why we feel that way. Usually we know something that is not reflected in the financials. This can be more subjective, so we have to be careful and try to quantify why we feel uneasy with the stock.
Substantial Change in the Business
Sometimes the world changes and what you were selling yesterday at a premium you can't give away today. This phenomenon has been played out since the beginning of time. Rock gathererss were replaced with club makers who were replaced with spear makers who were replaced with arrow makers who were replaced with musket makers who were replaced with rifle makers, and so on. We see this happening today with the print media. Companies like Courier Corporation (CRRC) that publishes, prints and sells books, and Gannett Co. Inc. (GCI) an international media company that owns USA Today have struggled recently as people have moved from print media to online. Both companies were unable to continue the string of historic consecutive dividend increases.
Other times a catastrophe will shake a company to its very foundation. This has been most evident with the oil disaster in the Gulf. BP (BP) was not prepared for a situation like it faced. As the damage claims mounted, investors lost confidence in management to stop the oil flow and began to sell off the stock. A dividend cut soon followed.
Buy-And-Hold Not Buy-And-Forget
All investors need to be vigilant and keep a close watch on their investments. There are few certainties in an uncertain world. Things change and adjustments must be made. Buy-and-hold is a successful investment strategy; buy-and-forget is a recipe for disaster.
Full Disclosure: Long CTL, UHT, TEG, ADP. See a list of all my dividend growth holdings here.
- Managing Risk With Dividend Stocks
- 9 Stocks With a Sustainable Dividend
- 11 Low Beta, High Quality Dividend Stocks
- Five Dividend Stocks To Buy On A Dip
- The Secret To Finding The Best Dividend Stocks
- High Yield Dividend Stocks in Gurus' Portfolio
- Top dividend stocks of Warren Buffett
- Top dividend stocks of George Soros
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