Day #9 When it’s Time to Say Goodbye Before The Dividend Cut Happens
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This is the ninth part of an exclusive series on 10 Days to Invest with Profits for Life. If you have lost your emails, here’s where you can find the first eight emails:
When it’s Time to Say Goodbye before the Dividend Cut Happens
The great thing about buying dividend stocks is you don’t have to sell too often. Most dividend stocks are paying distributions because they are confident in their ability to generate profits in the years to come.
Unfortunately, this doesn’t guarantee they won’t cut their dividend one day. A dividend cut is an automatic sell for my portfolio. I won’t support any company that fails to pay its distribution. From time to time, I review my portfolio and ask the same three questions for each stock:
3 Questions to know if you should sell your stock or not
It’s one thing to go dividend investing; it’s another to sell stocks with good potential. In my current process, I try to ask myself the following 3 questions. They motivate my choice of making the trade or not. I ask them in order to get a simple yes or no answer. This way, it’s easier to pull the trigger and sell the unwanted stocks!
#1 Do the Reasons Why I Bought This Stock In the First Place Still Exist?
There are obvious reasons why you made such and such moves. They may not be good or rational, but still, you made your trading decision based on something. So before you sell any of your stocks, you must know if the reasons why you bought it are still valid. It can be based on fundamental analysis, future projects or opportunities. Some are more obvious than others to determine. If the numbers are not good, you may want to fire your stock before it burns you!
You should have set few key dividend growth ratios (read about mine here) that you will follow rigorously. If a company starts to fail to meet these requirements, don’t be shy to pull the trigger.
#2 Does This Stock Fit Into My Investing Strategy/Asset Allocation?
After determining your investing strategy and asset allocation, the very first move you need to make is to get rid of all stocks that no longer fit. So if you don’t want to invest in penny stocks or want to leave American financials, you better sell them right away and start looking at what to buy next.
#3 Do I Expect To Make More Money With Another Stock/Strategy?
In this case, I can also talk about making money with a different strategy. I have been more a growth investor than a dividend investor over the past 7 years. It served me well in the past but I think that I can join growth and dividend investing at the same time. Eventually, I would like to have a complete portfolio paying dividends and invest my liquidity in index funds in the meantime (I’ll explain why I select index funds rather than index ETFs in a further post). But in the meantime, I want to make sure I don’t leave money on the table with my current picks. If I believe that any of my stocks may surge in the next 2 years, I will keep them instead of buying dividend stocks right away.
Do I consider Profit/Loss Before Selling?
While I think I should always stick to my first 3 questions, I must be honest and say that it’s easier for me to sell a stock when I have made a profit than when I’m losing money. I don’t really mind selling a good pick because I would rather cash in than dream of paper profits. When my stocks are losing money, I have a harder time selling because I tend to think (read sometimes imagine!) that the reasons why I bought the stock are still good and that I will eventually make money.
For a most complete buying and selling strategy, I suggest you read my book Dividend Growth: Freedom Through Passive Income. I detail each step to buy, manage and sell your stocks efficiently… and with a profit!
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