We had over 200 people join last week’s live event. What a great turnout! If you missed it, we’ve posted a recorded version along with a transcript and the PowerPoint slides in the Dividend Digest online community.
I tried to share way too much information for a one-hour call, and I ran a little short on time. As promised, I will work through the submitted questions and the sections I couldn’t cover over the next few weeks in this letter.
Let’s start with knowing when to sell. Many would argue that this is more difficult than knowing when to buy.
For dividend investors, it’s a little more complicated than buy low and sell high. We want to buy low and lock in an above average yield, of course, but the main goal is our income.
If the goal is to build wealth, the plan would be to hold a stock for years or even decades. When reinvesting dividends, the real power of compounding accelerates at 7-12 years. Instead of collecting that income, the investment grows as you accumulate more shares.
If the goal is to boost your income right now, you want to hold a position for as long as it’s achieving your goal. That could be a year or two… but hopefully you’ll get many years of stress-free income.
Capital gains are a nice bonus, but that is not the primary focus. If share prices stay flat and I get my income, I’m still happy. But no stock stays perfectly flat; prices will seesaw. As long as a price dip isn’t due to a big dividend cut or a sign the company is in real trouble, it can be an opportunity to buy more shares with a higher yield.
So, how do you know its time to sell when your position is performing well?
Don’t Let Your Positions Haunt You
One of my favorite things about dividend investing is that you don’t have to constantly monitor the market. In general, if a company is paying a steady and rising payout, it’s a big and boring business—which we like.
If owning a specific stock is keeping you up at night, then it’s time to sell. Seriously. If you’re fighting the urge to check a stock’s price several times a day, then it’s not living up to your goals.
This is true whether the stock price is moving up or down.
If shares are down, you’re stressed, and you don’t think there’s a chance of recovery, then sell. Take the loss and move on. Redeploy the money elsewhere and clear your head.
If shares are up and you’re stressing about losing those gains, do the same. Don’t look back and second-guess your decision. Be happy with your gains and move on.
Also consider using a stop loss strategy. Determine a specific price or percentage loss at which you will sell.
Most brokerage accounts will let you enter stop-loss orders. When your price or percentage loss is hit, it will trigger an automatic sell. I prefer to track my stocks myself and manually enter a sell order. This avoids being stopped out if the stock takes a temporary dip for a few wonky hours of trading and recovers. I like to make the final decision based on current circumstances.
Capture Tomorrow’s Dividends Today
Here’s another way to think about selling a dividend stock: Look at price gains as extra years of income you can lock in today.
Here’s an example straight out of the Yield Shark portfolio.
We bought shares of Philip Morris (PM) back in October 2021 for $94.87. Our effective yield is 5.7% and we have collected $18.08 in income. Shares now trade around $180. That’s a gain of roughly $85 or 89%.
The gain on PM is equivalent to 15.7 years of the current annual dividend. By selling our position, we accelerated the holding timeline. We locked in nearly 16 years of income and redeployed that money into another dividend opportunity.
You always need an exit strategy, whether it’s my two signs or your own plan. Not having one is a surefire way to miss shorter-term income opportunities and long-term wealth building goals.
For more income, now and in the future,
Kelly Green
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
© Mauldin Economics
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