Friday, January 1, 2016

So Long, Seadrill

Yesterday, I closed all my MLPs (master limited partnerships).

I no longer want to own MLPs because I don't like dealing with the somewhat complicated tax reporting requirements. I'm not in a particularly good mood when I'm filing taxes, so dealing with obscure details and confusing variations in Schedule K-1's is not my idea of fun.

Today is the third anniversary of DivGro's founding, although my first post announcing the blog appeared on 10 January 2013. It has been an exciting 3 years!

I created DivGro to generate a reliable and growing dividend income stream. By keeping track of the portfolio and interacting with like-minded investors, I've become a better dividend growth investor. I've learned a tremendous amount about dividend growth investing. Some of the lessons have been painful, but looking at the bright side:

The only real mistake is the one from which we learn nothing. – John Powell
You will only fail to learn if you do not learn from failing. – Stella Adler
All men make mistakes, but only wise men learn from their mistakes. – Winston Churchill

I need to repeat yesterday's lesson, because it certainly applies to my speculative foray into Seadrill Ltd (NYSE:SDRL):
If a company cuts my dividend, I will cut its shares from my portfolio!
If I had expunged SDRL from my portfolio when the company cut its dividend, the capital loss would have been less painful.

Going back to before the dividend cut when I doubled-down, I wrote the following:
There is a possibility that SDRL will cut their dividend, although the company suggests in its second quarter earnings release that the current dividend is sustainable through 2015 and possibly into 2016:  
The Board has in connection with the disclosure of second quarter results evaluated the current dividend level. Particular emphasis has been put on financial position, order backlog and future prospects. The Board has resolved to maintain the regular quarterly dividend at US$1.00 per share. The Board had communicated earlier that this dividend level is sustainable until at least the end  of 2015. With the recent contract announcements and the solid execution on the financing side, the Board is pleased to report that we feel increasingly comfortable that this period can be extended well into 2016 without any significant recovery in the market.

So, I entertained the possibility of a dividend cut, yet convinced myself that the dividend cut was unlikely based on what SDRL's Board said. I also wrote:
It is certainly one of my riskier buys, given the relatively short dividend history and erratic earnings history. However, I like SDRL for several reasons, including, of course, the impressive yield and dividend growth rate. 
There are several lessons to learn here, but rather than belabor the point, let me state it succinctly:
Don't speculate. Don't chase yield. Don't downplay risk. Don't trust the Board. 

Sayonara SDRL

I bought shares of SDRL on 2 occasions, in April 2014 at a starting yield on cost (YoC) of 11.23% and in October 2014 at a YoC of 16%, when SDRL was still paying a quarterly dividend of $1.00 per share. Shortly after communicating that SDRL's dividend was sustainable until the end of 2015 and possibly into 2016, the company suspended its dividend.

 Bought: 72 shares of SDRL at $34.91 per share:
 Dividend on 72 shares at $1.00 per share:
 Dividend on 72 shares at $1.00 per share:
 Bought: 100 shares of SDRL at $24.97 per share:
  Sold: 172 shares of SDRL at $3.65 per share:
Capital loss:

Total dividends received:


Net loss:

The net loss is 84.7% on the original amount invested, or 58% annualized. For tax purposes, this is a long-term loss and I should be able to offset it against future long-term capital gains.

Thanks for reading! Here's wishing you a prosperous and happy 2016 – take care, everybody!


  1. I can understand you wanting to "simplify" tax time without dealing with those K-1s. They are a pain. I know it. I used to own KMP, ETP and EPD years ago and when they arrived which was always well into the new year it was a hassle to calculate and figure everything out. For my long term dividend growth portfolio I did not buy one MLP though I have some on my watch list. I may remove them sooner than later as I feel less compelled to buy into the sector now more than ever. Thanks for sharing your recent sell.

    1. Thanks for reading and commenting, Keith -- you're right, K-1s are a pain. I've been encouraged to rather pay someone to do my taxes and have them deal with the K-1s. That's an unattractive option for me. I feel most of the work is gathering documents. Filing with tax software makes the rest easy, except, of course, for taxes involving MLPs, which seem to have more exceptions than rules. Its rather sickening.

      BTW, there are funds with MLP holdings that deliver solid (higher) yields, which may be worth considering as an alternative. The funds take care of the tax complications...

  2. DivGro-Have you read the Single Best Investment book? If not I highly recommend it.

    Best returns!


    1. This is what I love about this community! Thanks for the recommendation, Philip -- I just downloaded the book!

      Take care!

  3. Selling when a dividend is cut is a good rule to have. I typically do that, but for KMI, I haven't followed my own rule yet.

    1. It is important to do a thorough analysis of the stock post dividend cut. Perhaps there are good reasons for the cut. For me, the mere fact that a cut was deemed necessary changes my outlook for future prospects. In future, I'll sell and consider buying the stock (much) later if and when prospects look up, again...

  4. Replies
    1. Thanks, David -- though I posted this one on New Year's Day, I took the action way back in 2015 :-). Moving on!


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