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What Makes Me Sell a Stock?

January 14th, 2014 at 06:40 pm

I invest in dividend-paying stocks. I've explained why in my blog post "Why I Only Buy Dividend Stocks". And I've detailed how I choose which dividend stocks to buy in my blog post "My High-Yield, High-Risk Investing Strategy." But I also have a strategy for when to sell a stock. When to take a profit. And when to evict a company from my portfolio, regardless of profit or loss. Here is that strategy*.

I hold stocks to collect dividend payments. I don't buy a stock expecting to sell it. And as long as I think a company will continue to pay out the dividends I bought it for, I don't anticipate selling its stock "just" because its price has dropped. But enough of an unrealized gain in one of my stocks will cause me to sell it.

That "sell" signal is based on my portfolio's 8% average dividend yield. (Remember, it's a high-yield, high-risk portfolio.) If the price of one of my portfolio's stocks is up 10% from the price I bought that stock for, that unrealized gain is more than the dividends I could collect by holding that stock for an entire year. And collecting that whole year's dividends now, by selling the stock, is guaranteed. So in such a case, I will sell the stock -- at a 10% profit or better -- and collect all of the next year's dividends in advance.

Having sold the position, I then have to find some other company's stock to buy in order to put the sale's cash proceeds back to work. But -- because I've done the equivalent of collecting a year's dividends in advance -- I have plenty of time to patiently wait for a good buying opportunity.

I will also sell off a stock if a change in the company's business model threatens the continued viability of the stock's dividend. And I will sell it, whether at a profit or a loss.

One example: I've sold off a mortgage Real Investment Trust's stock because the company announced a change in its business model to begin buying mortgages not guaranteed by a government agency. Another example: I've sold a tanker company's stock because the company announced a change in its business model to shift from arranging long-term charters for its ships to putting the ships up for short-term "rental" on the shipping spot market.

In both above cases, I judged the business model changes to pose a serious threat to dividend stability. And so I sold off the stocks. But such sales are not prompted by a stock price drop. They are prompted by my perception of a threat to the high-yield side of my investing strategy.

That's my stock selling strategy in a nutshell. I'll take the profit if the sale will give me a year's worth of dividends in advance. And I'll dump the stock of companies making business strategy changes that I believe will threaten their dividends. Otherwise, I ignore stock market movements and the market price of stocks in my portfolio.

What is your stock selling strategy? What do you think of mine?

*I am not a financial advisor, and I am not recommending that anyone else do what I do. I have written this post to record what I do and to motivate discussion.

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