You know what’s as hard as knowing the right time to buy for an investor? Trying the right time to sell! Last week I shared my tricks to get rid of the paralysis by analysis syndrome, which was designed into a series of 6 steps to follow in order to get into the right mindset and start investing instead of waiting on the side line.
Now that we have faced a mini correction and that some sectors are still get kicked around (REITs, MLPs and Utilities anyone?), some investors are getting anxious and wonder when it’s the right time to sell. Here are my tricks to know when it’s time to go.
Why selling in the first place?
As a dividend growth investor, my goal is to build a portfolio filled with money-making machines. Most importantly, those money-making machines need to print more money year after year. The true power of dividend growth investing lies inside the ever growing dividend paid. Companies doubling their payouts every 7-10 years will offer you a tremendous return over the long haul. Therefore, why should you ever sell any of those incredible money printing machines? Because you and me are human and sometimes, we make mistakes.
In an ideal world, we would only hold stocks that we will keep forever. For that reason, I don’t have a “process” to get myself in the right mindset to sell. When it comes down to selling, it is often the opposite; you should have tricks to get yourself in the right mindset to ignore market noises and do not give up to fear.
01 Never sell because you are losing money
My first “mantra” is to never sell because I lose money. Unfortunately, I have a few losers in my portfolio. However, only two of them are “long-time” losers, meaning they have been in my portfolio with a paper loss for more than a year. Short-term losers are not really bad investments, just consider them as being “temporarily unlucky”. A good example would be one of my recent trades in Enbridge (ENB.TO) that is now -15% in my portfolio. Is it a bad investment? Not at all! But I’ll get to that in a moment. Let’s keep our focus on real losers for now.
I have 2 small positions in Helmerich & Payne (HP) and Gluskin & Sheff (GS.TO) showing negative returns (excluding dividend) of -28% and -47% respectively. One could get “tired” of having those reminders of a failure each time they look at their holdings, or one could panic and sell just because he doesn’t want to lose more money. When a stock is showing a loss for a long time, I go through a very simple process to see if I should keep it or drop it.
02 Is the dividend sustainable?
As I mentioned several times on this blog, dividend growth is the most important metric for my investing strategy. Therefore, when a company is struggling, the first thing I look at is its ability to maintain its dividend.
I look at the company’s revenue and earnings trend but also at its payout and cash payout ratio as well. Sometimes, you must do more research and look at the FFO and AFFO (and the payout) to make sure you get the right numbers. If the company proves it can continue to pay its dividend, I’ll be patient and wait to see if it can get out of its troubles.
03 Review your investment thesis
Once I’ve confirmed that the dividend payment is sustainable, my second and last step is to review my investment thesis. Why am I using a simple 2-step method to determine if I should sell or not? Because my goal is to keep my holdings, not sell them!
Instead of wondering about the timing or about what is happening on the market, I isolate my decision. I ignore the noise and solely focus on the business. I do that for 2 reasons. First, everybody looks good on their prom night. Second, everybody looks awful next morning. Therefore, if you consider the market noise, everything is a buy in 2007 and everything is a sell in 2008.
By keeping my decision within the very reasons why I purchased the stock in the first place, I make sure I don’t make a mistake by selling a potential winner. When I wrote my article about the buy struggle, I highlighted the importance of convincing yourself you are making the right decision. By identifying a list of reasons why a company will thrive in the future is a good way to do it.
Then, if you want to know why you sell, the same company must not meet the reasons you have previously listed. It’s that simple.
You thought the company would establish itself as a leader and failed? You might want to sell.
You thought the company would grow its market internationally and it’s not working? You might want to sell.
You thought the company would launch a new service and grab market shares, but it sucks? You might want to sell!
But if the company does everything you thought it would and the market is just being difficult, then you should keep your stock and cash your dividend with a smile. Helmerich & Payne is a good example of this situation. The business is currently evolving in a challenging environment where several smaller players are dying. HP is the leader in drilling wells in the U.S. Each year, it grabs more market shares and finds a way to survive. The energy industry is cyclical (duh!) and when it will go back on an uptrend, HP will be among the first company to benefit from it.
Note that in this case, the dividend may be compromised at one point. Since HP represents less than 2% of my portfolio (a rare low weight in my portfolio), I decided to keep it nonetheless. However, I follow HP evolution quarter to quarter with great interest.
04 Never sell because you make money
Some investors have 20% or 30% rules to manage their portfolio. Whenever a stock jumps or drops by 20-30%, it becomes an automatic sell. While this method avoids you being stuck in a paralysis mode, this is far from being optimal.
As a referenced, I wrote an article about the triple digit club. Those are the real winners in your portfolio. If you sell stocks when you make good money, you will definitely cash your profit, but you will also leave a lot of money on the table. Some companies could even generate a 1,000%+ return over time. You don’t want to sell those after making a 30% profit over a year, don’t you?
If you sell… what’s next?
The point will always be the same: never surrender to fear. Make sure you know the reason why you hold each stock in your portfolio. Then, it is a lot easier to know why you should keep them or you should sell them.
But if I have one last trick to offer you is this one: if you sell, have your buy list ready. If you don’t, your money will lie in your cash account doing nothing for several month and you will get back to square one: paralysis by analysis!
Nice list guy.
I have a couple losers as well. The dividends keep coming though although corus may cut theirs. A 50% cut would still be 8% though! Ill keep stacking those stocks through drips.
I keep debating selling cisco as im up 80% but like you said why sell a stock firing on all cylinders.
Buy good companies and when they drop in price add to them!
I think you are making a small mistake; if Corus cuts its dividend by 50%, it will pay a 8% dividend yield, but not based on your cost of purchase. Chances are it will become a 4% yield in your portfolio (+ a 50% capital loss on paper).
I just bought CSCO not too long ago, I think it still has great years to come!
Very nice set of points. I am holding on to my index funds for now. I agree with your 30% rules etc. I used to own blue chip companies back in 2013. I sold them after sizable profits. Not the best decision to be made. The only reason I would sell a stock is if it was a speculative buy and has fallen by 20%. As usual nice article mate.
Thx Div Geek!
I only sell stocks after a quick profit when that was the whole goal (therefore my investment thesis) in the first place. QCOM could be a good example for that.
if the stock is not doing the business as i thought and is in loss of 75% from my buy price is it right to sell or wait for few quarters, where visibility is not seen?