When should I sell stock I bought as an investment?
At heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it. But, economic cycles and temporary misfortunes don’t necessarily turn a good company bad. So, under what conditions should I decide that a formerly good dividend growth stock has ceased to be one?
In my previous post I identified four criteria I’ll use to make that decision. But there are other, less analytical, reasons I may consider selling such as:
E. The company’s survival is threatened by a very large legal liability.
The BP oil spill in the Gulf of Mexico springs to mind; as do Toyota’s recent multiple recalls. In the case of BP I actually did sell when it looked to me that the magnitude of BP’s growing potential liability could bankrupt the company.
I sold my BP shares at a 10% loss and ended the transaction a happy man. I didn’t own Toyota so, I don’t know if I would’ve sold my position or doubled down when the second recall was announced. By the time of the fourth recall, however, I’m pretty sure I’d have bailed.
F. The company enters into a major merger agreement.
I own shares in CenturyLink (CTL) and I’m very happy collecting its big dividends every quarter. Nevertheless, when CenturyLink announced its pending merger with Qwest I immediately started thinking of cashing out my entire position.
Without any details of the planned merger, I anticipated that Qwest was buying CenturyLink. But, when I read the information packet sent to shareholders I was pleasantly surprised to discover CenturyLink is buying Qwest, and for small fractional shares of CenturyLink for each share of Qwest.
I’m still a little concerned that the merger might screw up CenturyLink’s future dividend increases. But, I think the odds are that CenturyLink will continue to grow its payout as a result of the merger. So, although I certainly considered selling, in the end I chose to retain my CTL shares.
Last year ExxonMobil (XOM) entered into an agreement to buy XTO Energy (XTO). XTO was one of my favorite and most profitable holdings at the time and I was sorely disappointed at the announcement. I didn’t hesitate to pull the trigger on XTO, however. I sold my shares within the week. XTO was going away and there was no help for it.
G. The stock’s total return falls below 10%.
I recently sold my positions in several stocks because my projection of their total return was less than 10%. I estimate total return by adding the current dividend yield to the five year earnings growth rate (earnings not earning per share).
I nearly sold my Johnson and Johnson (JNJ) stock for the same reason. But, it’s such a good dividend payer that I haven’t yet been able to pull the trigger on that sale. I certainly considered it though.
As you can see, these three additional reasons to sell are not as conclusive as the previous set. They are, however, reasons I consider valid. They will cause me to consider selling.
Next, I’ll review reasons to sell stock that are unrelated to the specific company,
Link to Topics in the Special Report: "When to Sell"