Regardless of the status of the stock market, you should always be ready to sell a holding but more importantly when to sell a stock. It’s very important to control your emotions and follow your strategy.
We spend most of our time looking for opportunities but sometimes we need to sell a stock and it’s a different mental process. Make sure you put aside any emotions and just evaluate the investment as is. Until you sell, it’s just a paper loss.
Below are some warnings or signs that you may want to consider selling.
Signal 1 – Dividend Yield Too High
A high yield is a preliminary sign that a dividend cut is imminent. It’s the investors showing they don’t believe in the company’s payout based on the price they are keeping the stock at.
A good rule of them to understand if the dividend yield (or distribution) is too high, compare it with its sector and industry peers. If it’s far above the average, it should be a warning sign. Try to understand why it’s high and listen or read the latest earning reports.
Signal 2 – Dividend Cut
A very big flag is when a company cut its dividend. Does that mean you should sell? In some cases yes and in others no. It’s really up to you but the dividend cut needs to be looked into.
If a company cuts its dividend because it did not manage the business effectively, it has to reflect neglect in the management team.
If the cut is based on external factors, it requires consideration. For example, the financial industry had a crisis and the rules changed. They needed to adjust for the new BASEL III rules. Last year, OPEC had a big impact on the energy sector and Canadian companies have been adjusting. At this point, the dividend cut becomes a decision on whether or not you want the business in your portfolio.
Signal 3 – Not Fitting Your Strategy
While we often start with a broad investing strategy, we tend to refine it to our needs based on where we are in our investing journey. Sometimes, change must be made and it may trigger the sell of a stock or more than just one.
For example, when I first started investing, I was usually focused on higher yield companies but as I learned more, I switched to dividend growth stocks. High yield is good when in retirement or approaching retirement but I want to benefit from the total return of my investments in my accumulation years. Total returns include the dividend yield but also the stock appreciation potential. See the Chowder Rule to easily estimate the total return potential of a stock.
Make sure you note somewhere on why you buy a stock. You might be surprised to read the note 5 or 10 years later and realize it doesn’t fit your goals anymore.
Signal 4 – Take a Profit
This is a fun one since you are making a profit. At times, you may want to take a profit if one stock has had a good run. It may be that you have more than you want in that sector or that you don’t believe it has room to grow further.
If you take a profit, just sell a portion. Winning stocks have a tendency to keep on winning sometimes and you may want to profit from it further. My railway stock (TSE:CNRNYSE:CNI ) has been winning for a long time. Until new pipelines from the oil industry emerges, somehow, they will continue to profit. Even though I add money to my portfolio, the stock price keeps on going up making it my largest holding over my target of 5%. Canadian National Railway is also an example of a stock I bought at the 52-week high.
Signal 5 – Company Fundamentals Changing
You may not sell, but it can be a sign to evaluate what the new management or CEO will do. A review after one quarter and a conference call could tell you what the executives have in mind.
Remember, not all stocks are winners at all times. I have the same holding (CNR) in two accounts which I have bought at different times. The investment is up in one account and down in the other. I am leaving it as is and it’s a reminder that time plays a big factor in seeing growth. Remind yourself that markets go up and down and time is needed for a recovery. What you do when the markets are down can have a huge impact on your dividend income portfolio, focus on opportunities rather than your paper loss.