More money is lost selling stocks than just keeping the shares and enjoying the ride through ups and downs of the market.
Over the years, I've monitored and managed my investment risks by selling or trimming certain stocks in my portfolio that I deemed as too risky or not conforming to my investment goals or principles.
In this blog post, I want to review my own selling behavior to determine whether I'm being too aggressive with my stock sell criteria and hurting growth of my overall stock portfolio and dividend income.
In doing so, I would look at my sell record over the past one and a half year to see if there is any truth to the above quotes and whether there are any lessons to be learned.
Ideally, a long-term or especially a dividend investor should rarely have to sell a stock as the premise of their investment philosophy is to build long-term wealth and/or to grow dividend income for life.
Dividend investment strategy is also one of the most followed and time tested investment strategy used by many FIRE (Financial Independence and Retire Early) enthusiasts like myself.
However, nobody is prefect and even seasoned investors make mistakes in picking stocks or worse when a good high quality stock turns bad due to various micro/macro economic or industry/company specific reasons. Some of which could be hard to foresee or avoid in advance.
As a dividend growth investor, I hate selling stocks as it not only decreases my dividend income, but it also increases my investment cost/fees and potentially tax liability; not to mention having to find other comparable or better investments at reasonable valuations is not always easy in a bull market.
In short, selling stocks creates a lot more work for an investor and churn on his/her portfolio. Nevertheless, there are valid reasons for a long-term investor to occasionally sell a stock or trim a certain stock position.
Some of those reasons may include but not limited to: to take profits from an overvalued position and to rebalance a portfolio, to avoid imminent danger of a dividend cut, or just because the fundamentals (revenue, earnings, cash-flow, etc) are not growing consistently or at a level to meet your target growth.
I do have certain rules for selling a stock position; however, at times I feel I may have been too keen to apply those rules or may be I'm too risk averse.
You can read about my buy and sell rules in my Investment Business Plan here: http://www.mrallthingsmoney.com/2017/01/my-business-plan-for-financial.html
To start with the review, here is my stock sale history going back to January of 2016. I will go over these sales to see which sales were truly necessary to avoid a dividend cut or suspension and which transactions were simply too risk averse or overreactions to some short-term issue.
Total number of sell transactions since January 2016: 32
These are 32 separate sell transactions and not 32 individual stocks. In other words, some of them are multiple transactions per stock as I may have owned multiple lots of the same stock/company which I sold at different dates as part of a trimming process.
In the above table, I have recorded what the stock price did after I sold the shares under the column " Price Appreciation/Depreciation since Sold". It helps me see whether I sold the stock too soon in the case of overvaluation scenario or did I actually avoid a big loss in stock price. In other words, was the sell transaction necessary or an overreaction?
I have also color coded the dividend status to show whether the dividend was cut, suspended, not changed, or increased after my selling of a specific stock. You can see that majority of the stocks in the above table did end up increasing their dividends and as a result also increased in value after my sale, this is somewhat troubling for me to see and would likely require an adjustment to my sell behavior.
Stock sold due to overweight/overvaluation, de-risk portfolio, or slow Dividend Growth Rate (DGR) reasons
These are the green highlighted transactions. All of them increased their dividends and most of them saw significant price appreciation. In fact, the top 5 of these stock positions increased by double digit percent after I partially or fully sold them:
No matter what the sell reason may be, the worst part is when the stock I just sold, turns around and appreciates another 10% or more. It has happened to me for more than a few times as you can see in the above table.
From the above sales, the Apple sell transactions have become one of my biggest regrets. I made a good profit on these sales, but I also missed out on an additional 38% gain. I chose to go with another higher yielding stock over Apple (the most valuable company) which in hindsight wasn't a good decision, at least in this case. What was I thinking?
Fortunately, I still own half a position in Apple stock in my IRA account, so not all is lost. I plan to keep those shares for a very long time and buy more during a major correction.
I was overweight in Main Street Capital (stock ticker: MAIN), it is considered as one of the best BDCs (Business Development Company); however, BDCs are normally in a risky business of lending money to not so credit worthy clients or small startup type companies. I just had too many shares and therefore, trimming this position seemed appropriate at the time to balance out the risk.
In hindsight, I could have let it run for a bit longer as there are still no signs of a recession. I do like the company and may add more shares if valuation comes down a bit.
Entertainment Properties (stock ticker: EPR) was one of my favorites as it pays monthly dividends. Though, I was becoming concerned about its dependence on movie theater bussiness which is in a decline. Besides, I was looking to trim my overall REIT position due to rising interest rate environment and reduce positions in stocks that had lower credit ratings of BBB-. Therefore, I don't quite regret this sale, but I do hate missing out on another 23% profit.
Northwest Natural (stock ticker: NWN) is a natural gas utility. Very stable and consistent dividend payer, it is a dividend champion. Though it has one of the lowest DGR rates of 1%. I should have kept it since I bought knowing it has a very low DGR. Maybe it was a mistake buying it in the first place per my buy criteria; however, I doubled my mistake by also selling it as I lost a dependable dividend payer and missed out on a 20%+ price appreciation.
Stocks with no dividend increase/growth since I sold them
The stocks that had no dividend change also did not appreciate much post sale. Therefore, I consider selling them a good decision as I was able to avoid future capital loss while locking-in current profits which then I redeployed else where to increase my total dividend income.
Union Pacific (stock ticker: UNP) is the only outlier in the list above as it did increase its dividend by 10% before I sold it for a big profit. My reason to sell it was mainly overvaluation and low yield. Though the stock has only appreciated by 4.8% since I sold it in March, so not a bad sale after all.
There were total of only three stocks in my portfolio that actually cut or suspended their dividends. They were spread across total of 5 transactions/lots. The stocks were HCP Inc (stock ticker: HCP), Conoco Phillips (stock ticker: COP), and Textainer Group (stock ticker: TGH). Out of these, HCP was a dividend champion and it had a big position in my portfolio.
Both HCP and COP dividend cuts were a major blow to my portfolio and dividend income as both were long-term dividend payers and are still considered as high quality companies.
Textainer was a high yielding (7%+) and a high risk dividend stock to begin with. I bought it many years ago when I was chasing high yields (a common mistake newbie DGR investors make).
Company was operating in a difficult shipping container leasing business and they were facing some big industry wide pricing pressure and challenges which resulted in dividend growth slow down, a few cuts, and then finally a dividend suspension.
Luckily, I was able to get out of it as soon as they made their first dividend cut. There was a second cut soon after and then a total dividend suspension. Thank goodness I got out of it in time and with only a small loss.
In short, I'm glad to be out of such companies/stocks and would always remember the following lessons from this experience:
- Trust financials and not the management when it comes to dividend sustainability.
- Even long-term dividend payers can sometimes get into financial trouble and could be forced to cut dividends. It is rare but could happen. Therefore, it is always good to regularly monitor dividend coverage of a company regardless of their dividend paying history.
- High yielding stocks are most likely to cut dividends when their business or industry goes into a downturn cycle. So don't chase high yielders as most likely those high yields won't last.
Final Observations and Lessons Learned
Out of all 32 sell transactions that I made over the last year and a half, only 5 of those positions materialized a dividend cut or a suspension.
The majority of the stocks that actually raised their dividends (the green ones) showed price appreciation despite of whatever risks or overvaluation symptoms they were exhibiting at the time.
The stocks that cut their dividends or did not raise them (the orange and yellow ones) suffered the most price depreciation (with the exception of Conoco Phillips and RMR).
Looking at this data, I can't help but realize that I may have been overly aggressive with my trimming and de-risking process and as a result have sold/trimmed several good quality stock positions.
I consider them as a collateral damage and part of trying to reduce the overall risk profile of my portfolio; though I need to work on reducing this kind of damage in the future.
To avoid such a collateral damage in future, I would limit selling stock positions to only stocks that have failed to grow dividends for at least three quarters in the most recent year. In other words, I would not preemptively sell shares if the company is late in increasing its dividend by a few quarters.
I would also avoid selling/trimming any position on merely an overvaluation basis or slow DGR unless the company's business and financials are showing deterioration or a major industry or market share decline is brewing.
In most cases, it seems better to let such stocks run as high as they go while collecting and increasing dividends. There is more money lost and regrets to live with when selling long-term positions in good quality stocks.
Thanks for reading and hope you found this article to be useful. As always, I look forward to reading and responding to your comments.
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Disclosure: I currently own shares in several of the stocks mentioned in this article including: MAIN, INTC, AAPL, DLR, CVX, and VZ. In addition, I may start a new position in any of the stocks that I mentioned as sold in this article if proper buying conditions arise in the future.
Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer