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 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.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.
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 stocks current yield and if you are willing to risk a drop in the stock's price.
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 gathers were replace 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. A companies like Gannett Co., Inc. (GCI) an international media company that owns USA Today have struggled as people have moved from print media to online.Other times a catastrophe will shake a company to it 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: No position in the aforementioned securities.
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