Friday, July 8, 2016

Selling Three Winners

As a dividend growth investor, I select and buy stocks with a solid track record of paying and increasing dividends. I try to assess the likelihood that companies will continue to pay and increase their dividends, taking things like earnings growth potential, dividend safety and payout ratio into account. If I like what I see, I buy shares with the intent of holding onto them and collecting dividends.

Sometimes, a company decides to cut or eliminate its dividend. I really hate when this happens, because I prefer growing dividends over shrinking ones! Usually, when a company decides to cut or eliminate its dividend, I sell my shares. Experience has taught me that hanging on to shares after a dividend cut is foolhardy.

Dividend growth investing is a long-term strategy. You buy stocks that pay dividends, reinvest those dividends (if you can) and compound returns over time. So, why sell stocks if they perform well and continue to pay increasing dividends?

Well, maybe you need the cash. Or, you spot a better investment opportunity elsewhere. Or the company decides to merge or split and you don't like the idea.

Another reason to sell is when a stock trades well above fair value. The likelihood that such a stock will continue to outperform the markets is small. Moving funds from overpriced stocks to stocks trading at or below fair value will more likely reward you as a dividend growth investor.

Today, I'm selling two winning stocks that are trading above fair value, and one stock that no longer measure up to my stock selection criteria. I'll start with that one first:

Recent Sell: Nippon Telegraph and Telephone Corp (NTT)

NTT is one of my home run stocks, which is a stock that trades at more than double its cost basis.

Trading Summary

2013-02-13
 Bought 110 shares of NTT at $22.40 per share:
 $
2,463.99
2013-07-03
 Cash dividend on 110 shares:
$
45.02
2013-12-16
 Cash dividend on 110 shares:
 $
42.04
2014-07-07
 Cash dividend on 110 shares:
$
48.28
2014-12-15
 Cash dividend on 110 shares:
 $
40.35
2015-07-06
 Cash dividend on 110 shares:
$
39.75
2015-12-14
 Cash dividend on 110 shares:
 $
44.01
2016-07-05
 Cash dividend on 110 shares:
$
64.01
2016-07-05
  Sold 110  shares of  NTT at $47.90 per share:
$
5,268.90
Capital gain:
$
2,804.91

Dividends received:
$
323.46

Commissions/fees:
$
45.42

Net gain:
$
3,082.94

The net gain is 125.1% on the original amount invested, or 36.9% annualized.

NTT is no longer a CCC stock. Although the company has continued to increase its dividend, in US$-terms, the dividend has not increased consistently. Notice the effect of the $/¥ currency exchange on dividend payments. I prefer to see consistency in dividend receipts. Also, I use the spreadsheet accompanying the CCC-list extensively when analyzing stocks. The fact that NTT is not a CCC stock is a significant drawback. I'm very happy with NTT's performance but I've decided to move on.

Recent Sell: Reliance Steel & Aluminum (RS)

RS has climbed to an all-time high price above $78, pushing yield down to 2.03%. Morningstar's fair value estimate is $56, which means RS is trading at a premium of 39% to fair value.

Trading Summary

2015-06-12
 Bought 40 shares of RS at $63.90 per share:
 $
2,556.00
2015-09-11
 Cash dividend on 40 shares:
$
16.00
2015-12-18
  Cash dividend on 40 shares:
 $
16.00
2016-03-31
 Cash dividend on 40 shares:
$
16.00
2016-06-17
 Cash dividend on 40 shares:
 $
16.00
2016-07-05   Sold 40 shares of RS at $76.84 per share: $3,073.54
   Capital gain: $517.54
   Dividends received: $64.00
   Commissions/fees: $3.00
   Net gain: $578.54

The net gain is 22.6% on the original amount invested, or 21.3% annualized.

I think RS is a good company and worth keeping on my watch list. It is the 2016 top pick of one Seeking Alpha contributor, who confirms my feeling that RS has limited near-term upside:
Spread between Global and Domestic Steel Prices might suggest limited near-term upside for RS's stock price.
I'm happy with the longterm capital gains from my investment in RS, but its time to move on.

Recent Sell: Realty Income Corporation (O)

O's recent performance has been stunning. A contributor on Seeking Alpha, Brad Thomas, calls the REIT The Ultimate KISS REIT. O's share price continues to defy gravity and continues to confound some analysts.

I decided to sell half of my O shares, managing to do so at a price of $71.28 per share. Given my fair value estimate of $53.50 per share, the REIT is trading at a premium of 33% to fair value.
Trading Summary

2015-03-16
 Bought 50 shares of O at $50.67 per share:
 $
2,533.50
2015-04-15
 Cash dividend on 50 shares:
$
9.48
2015-05-15
 Cash dividend on 50 shares:
 $
9.48
2015-06-15
 Cash dividend on 50 shares:
$
9.48
2015-07-15
 Cash dividend on 50 shares:
 $
9.50
2015-08-15
 Cash dividend on 50 shares:
$
9.50
2015-09-15
 Cash dividend on 50 shares:
 $
9.50
2015-10-15
Cash dividend on 50 shares:
$
9.52
2015-11-16
 Cash dividend on 50 shares:
$
9.53
2015-12-15
 Cash dividend on 50 shares:
$
9.53
2016-01-15
 Cash dividend on 50 shares:
$
9.55
2016-02-16
 Cash dividend on 50 shares:
$
9.92
2016-03-15
 Cash dividend on 50 shares:
$
9.93
2016-04-15
 Cash dividend on 50 shares:
$
9.95
2016-05-16
 Cash dividend on 50 shares:
$
9.95
2016-06-15
Cash dividend on 50 shares:
$
9.95
2016-07-05
  Sold 50  shares of  O at $71.27 per share:
$
3,563.93
Capital gain:
$
1,030.43

Dividends received:
$
144.77

Commissions/fees:
$
0.00

Net gain:
$
1,175.20

The net gain is 46.4% on the original amount invested, or 25.5% annualized.

As mentioned, I'm selling only half of my O shares while retaining 50 shares. In the chart above, the shares represented by the blue circle are the ones I'm keeping. 

I'll consider increasing my position in O again when shares trade at or below fair value. 

By selling NTT, RS and half of my O position, I'm reducing DivGro's projected annual dividend income by $267.46 to $11,395.09. 

Thanks for reading! What do you think about these sales? What's your strategy for selling dividend growth stocks? Do you ever sell shares that are trading well above fair value, or do you "let your winners run?"

15 comments :

  1. Pulled the trigger eh? I dont blame you at all. I am up 56% on my O shares and as I previously commented... still deciding what I want to do with a few of my heavy gainers. I like your sell of NTT and RS though. I think those make perfect sense. REITs are hot right now though, so probably a smart move to sell half of O too. Hard to keep holding when charts are shooting straight up!

    ReplyDelete
    Replies
    1. Yeah, I pulled the trigger so to speak! As far as O goes, that was a harder decision to make, so I decided to sell only half. I really like O and, as you say, REITs are hot and it might go higher still. NTT was much easier. Its a semi-annual payer in yen, so the amount jumps up and down depending on the exchange rate. I don't like that. My brokerage also charges a fee for NTT's dividend receipts. RS did well for me but I want to start consolidating my portfolio, so the weaker stocks are going to have to go.

      Delete
  2. Interesting move, FerdiS. I am tempted with the O sale too...I am currently looking at almost 100% gain and the valuation seems pretty stretched. Very tempting to sell and take some profits here.

    Best
    R2R

    ReplyDelete
    Replies
    1. Congratulations on the performance of your O position! That's a magical gain! I've noticed you selling a lot of stocks recently, too. My motive is consolidation so I can decrease the number of positions in my portfolio and increase my investments in some of my core holdings.

      Best of luck and I'd be interested to see what you decide to do!

      Delete
    2. Congratulations on the performance of your O position! That's a magical gain! I've noticed you selling a lot of stocks recently, too. My motive is consolidation so I can decrease the number of positions in my portfolio and increase my investments in some of my core holdings.

      Best of luck and I'd be interested to see what you decide to do!

      Delete
  3. It's hard to bet against "O". The consistency of returns from the underlying assets is just really high. Hope it works out for you. I think keeping half was wise.

    ReplyDelete
    Replies
    1. I agree with you and that's why I kept half. If interest rates increase (who knows when), O and other REITs will take a punch in the gut. This sale doesn't try to anticipate that. I'm just looking at valuations and O is really hot right now.

      Delete
  4. After following many DGI blogs the last 3 years or so I have to say that in recent weeks it seems like I'm witnessing the most sells ever among our fellow bloggers. I can't say I'm too surprised after so many names have appreciated a lot and better buying ops can be found elsewhere. I have yet to sell any stock since I became a dividend investor in 2007. Not that I'm against selling I just feel comfortable holding at this time despite recent run ups. O is a name that has been circulating a lot for a potential sell too for good reason. Thanks for sharing.

    ReplyDelete
    Replies
    1. You're right, I've seen selling pick up as well. While run-up is a consideration in my selling, I have a specific goal. I want to increase the number of shares of a subset of my positions to at least 100 shares so I have more opportunities to execute options trades.

      Your record of not having sold anything since 2007 is remarkable!

      Delete
  5. Sometimes you just have to sell. It's a part of having a working portfolio. There are people who will slam others for selling when they argue the history of buy/hold strategies but sometimes there is a right way to exit and that right time is sometimes right now. Keep up the good work!
    -Dividend Reaper

    ReplyDelete
    Replies
    1. Hi Dividend Reaper -- I appreciate your point of view and agree: sometimes you just have to sell! Personally, I'm fine with letting (some) winners run, even if they start trading well above fair value.

      With the market trading as high as it is now, the opportunity exists to exit some holdings you may not be quite satisfied with. Imagine having to exit in more challenging conditions!

      Delete
  6. Nice job Ferdi. Noting wrong with selling to capture gains. I like to do this every once in a while to ether hold the cash, sell options, or buy undervalued stocks. I've been thinking of selling some of my O shares, but instead I've been selling covered calls. I may lose 100 shares as part of an options contract, but I'll be collecting premiums until this happens.

    ReplyDelete
    Replies
    1. I had exactly 100 shares of O -- I didn't feel like I want to exit O altogether, so I chose not to do the option trade on O. Hopefully, you can collect premiums AND retain your O shares! Best of luck with that trade. Thanks for visiting and commenting!

      Delete
  7. This market is pretty crazy right now and some of the valuations on some companies is getting me close to the point of making a sale. O especially as this run up doesn't really have any justification behind it. I don't know if it's "smart money" moving into the REITs before they get classified as a specific sector and added to the S&P 500 or what but it's crazy. DLR is another where I was tempted to buy some near the end of last year and then saw it's climbed another 20-30% since then.

    ReplyDelete
    Replies
    1. I think you're right about people getting into REITs before the new REIT sector is added in September. I certainly can't find another explanation for the massive run-ups! I'm so glad I bought DLR when I did. It has really served me quite well in DivGro. Tomorrow I'm posting 3 more sales. I'm hoping that I can find a good spot next week to do some buys, but this market is really hot right now!

      Take care and happy investing!

      Delete

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