Yesterday, I sold all my shares of PennyMac Mortgage Investment Trust (NYSE:PMT) because the mortgage REIT (real estate investment trust) cut its dividend from 61¢ per share to 47¢ per share. In announcing the cut, PMT's chairman and CEO, Stanford L. Kurland said: "PMT's objective is to distribute its income through quarterly dividends that reflect the earnings per share we expect from the present investment portfolio.”
While PMT's reduced dividend still represents a 12.63% yield, I no longer believe the investment should be in my portfolio. This sell removes $292.80 from DivGro's projected annual dividend income.
While the rejection criteria I use to manage DivGro provide reasons not to buy a stock, a dividend cut spurs me to revisit my original investment thesis.
In the case of PMT, my bet on the company's ability to sustain its dividend didn't pay off. I chased the double digit yield and got burned! Since buying my shares the stock price has dropped by 29%, which is the only reason that PMT still offers a double digit yield.
Here is a chart showing the dividend yield and stock price history for the duration of my investment in PMT. Initially, it seemed, my investment looked like a good one as the stock price increased to about $23. In 2015, however, things turned around and the stock price started a prolonged downward trend:
As a dividend growth investor, my objective is to generate a growing dividend income stream. PMT no longer supports that objective and I'm moving on.
So far this year, I've sold all my shares of South32 Ltd ADR (OTCPK:SOUHY), PartnerRe Ltd (NYSE:PRE), Baxter International (NYSE:BAX) and Baxalta (NYSE:BXLT):
- 40 shares of SOUHY for a net loss of $53
- 27 shares of PRE for a net gain of $1,437
- 37 shares of BAX and 37 shares of BXLT for a net gain of $496
Trading Summary
I bought 120 shares of PMT in May 2014 at $20.94 per share, securing a starting YoC (yield on cost) of 11.27%. In September 2014, PMT increased its quarterly dividend by 2¢ per share, resulting in a YoC of 11.65%.
2014-05-09
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Bought: 120 shares of PMT at $20.94 per share:
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$
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2,512.79
|
2015-11-02
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Sold: 120 shares of PMT at $14.81 per share:
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$
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1,777.18
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Capital loss:
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$
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735.61
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Dividends received:
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$
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420.00
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Commissions/fees:
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$
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0.00
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Net loss:
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$
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315.61
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The net loss is 12.56% on the original amount invested, or 8.46% annualized.
Before the dividend cut, 120 shares of PMT yielded $292.80 of annual dividend income. Consequently, I'm reducing DivGro's projected annual dividend income by that amount to $6,821.29.
Have you sold shares this year? Did you have a capital gain? Do you think of selling holdings to offset capital gains and so reducing your tax liability?
Sometimes you have to make difficult decisions that are best for the future of the portfolio.. I think this is one of those choices. It's never easy to sell a losing position, but recovering from this dividend cut could take several years.
ReplyDeleteThanks for sharing!
Best wishes, DfS
Thanks for your comment, DfS!
DeleteI agree with you. This was a difficult decision but the right one to make for DivGro. The most important, though, is the learning associated with this position. I chased yield and got burned. Perhaps there are similar positions lurking in my portfolio that I should get rid of over time.
Take care!
FerdiS
Well done on staying disciplined and keeping consistent with your strategy. In the long run it will pay off. I agree with DfS, its not easy selling a losing position, but when your looking at a 22.95% dividend cut, that definitely sends off red flags for a dividend growth strategy.
ReplyDeleteThanks, Derek! I don't like selling losing positions, but it is better to cut your losses and move on when the company cuts its dividend...
Delete