Thursday, November 17, 2011

When Do We Sell?

Since I reviewed Intel about a month ago the stock has gone up over 10%.  It was a nice jump and long overdue in my opinion.  The stock has been hanging around $20 area for several years now, all the while it has been beating analysts estimates and raising its revenue and income guidance. Personally I think Intel is still considerably undervalued based on present day valuation, but as a dividend investor I absolutely love being able to buy a dividend growth stock this cheap.  After all, the lower the price the higher the dividend yield.

But as dividend investors we don't care that much about the price of the stock.  We care about it when we are considering purchasing the stock, but after a purchase we should care about the dividend fundamentals and not the price.  I've gotten a few emails from people asking when I would consider selling part of my position in Intel and take some profits.  My answer of when I plan to sell Intel, "hopefully never".

I don't buy dividend stocks in order to make a gain on price.  I buy a dividend stock because I think that company will be around when I retire.  I believe that stock will continue to pay and raise their dividend for the rest of my life.  I want that stock to be providing me a passive income stream through dividend payments when I am 60+ years old.

Of course, that's in a perfect world.  There will be times when a dividend stock falters and its fundamentals forces us to sell.  Hopefully this is a rare situation, but we need to identify those situations that will cause us to sell our stock.

  1. Dividend payments stop - If a company is no longer paying a dividend, there is no reason we want to hold that stock as dividend stock investors.  This is a rare situation for a dividend stock (BP did this after the Gulf oil spill), normally we will get a warning sign that causes us to sell before this happens. That warning sign typically is...
  2. Dividend payment is cut - When a company cuts (reduces) its dividend its time to sell.  A cut dividend is a sign of bad things happening with the company. We want stocks that continually raise their dividends so we get that sweet, sweet compounding affect.  Many times we will get a warning before a dividend cut, that warning sign typically is...
  3. Dividend payment is flat over multiple years- Many times before a company cuts its dividend payment its dividend will remain flat over several years.  If a company has had a history of raising its dividend each year and all of a sudden holds its dividend at the same level for over a year we need to start worrying.  There can be good reasons for a company doing this, but when it extends beyond two years I feel its time to sell.
  4. 5 year dividend growth rate < 5% - Its great that a company raises its dividend each year, but if that increase is minuscule then we need to reevaluate. We want, at minimum, a dividend increase that is above inflation.  If a company's average 5 year dividend growth rate is < 5%, its time to sell and look for a better dividend grower.
  5. Merger / Buyout - If a company merges or gets bought out by another company, the dividend policy can change.  The current economic climate is prone to mergers and buyouts, so this is something that we could run into.  Of course, if a company gets bought out, it's usually at a price premium so this isn't such a terrible thing like the above.
  6. Business Change - We live in an ever-changing world, and if a company does not adapt to these changes they can be left out in the cold.  For instance, Gannet Corporation (GCI) had a strong dividend history as a newspaper (USA Today) and magazine company.  The internet has slowly killed their business and profit margins, causing GCI to cut its dividend considerably.  If we can see these types of changes happening, we might be able to get out before sh!t hits the fan.
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.

Disclosure - I am long INTC.

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