Sunday, November 22, 2020

My First Sell in Eight Months

The last time I wrote about selling a stock was in March this year when I trimmed my position in Amgen (AMGN). 

Before the Covid-19 pandemic hit and changed my approach, I wanted to reposition DivGro to produce annualized returns of at least 8%. That would have resulted in trimming or closing positions with unfavorable Chowder Numbers (CDNs)

The impact of the pandemic on the economy changed my approach. Instead, I'm now focusing on increasing DivGro's defensive exposure

This article discusses a recent sell, one in which I closed a position due to a recent dividend cut. 

On 4 November, Dominion Energy (D) declared a quarterly dividend of 63¢ per share, a 33% decrease from its prior dividend of 94¢. 

The dividend cut was not a surprise, as the company gave detailed guidance when it announced an agreement to sell all of its Gas Transmission & Storage segment assets to an affiliate of Berkshire Hathaway Inc (BRK.A):
The company now expects to target an approximately 65 percent payout ratio to be effective upon completion of the transaction. This new payout ratio implies a 2021 dividend payment of around $2.50 per share. The projected reduction in the annual dividend reflects the absence of income from the divested assets and a revision to the company's target payout ratio to align with best-in-class industry peers. 
Beginning in 2022, the company expects annual dividend-per-share increases of approximately 6 percent per year.  This represents a significant increase from previous long-term dividend per-share growth guidance of 2.5 percent.  
For 2020, the company has made two quarterly payments of 94 cents per share in March and June. The company expects to make an additional payment of 94 cents per share in September and currently expects a fourth payment in December 2020 of approximately 63 cents reflecting the expected timing of transaction closing.

It appears that Dominion is repositioning itself as a pure-play, state-regulated utility with increased cash-flow stability and higher dividend growth in the future.

How do I treat dividend cuts and suspensions?


In describing DivGro's constitution and management strategy, I noted the following with regards to handling dividend cuts and suspensions: 
Generally, I will sell all my shares after a dividend cut. If the dividend is frozen rather than cut, I may decide to hold onto my shares, depending on circumstances.
While I still subscribe to that general philosophy, I decided to handle dividend cuts and suspensions due to the economic impact of the COVID-19 pandemic differently. Many companies consider their dividend cuts or suspensions temporary, so I'm willing to give these companies some leeway—at least until December when I usually consider trades for tax-loss harvesting purposes.

My DivGro portfolio suffered several pandemic-related dividend cuts and suspensions:

I've also experienced a distribution cut in one of the closed-end funds I own:

These cuts and suspensions reduced DivGro's projected annual dividend income (PADI) by about $1,832. But I replaced that dividend income by selling covered calls on the underlying positions. 

Next month, I'll decide what to do with these positions. If tax-loss harvesting turns out to be beneficial, I would have to buy back the covered calls in order to close out these positions. Otherwise, in January, when these options expire, I'll consider doing another round of covered call selling.

Why close my D position?

D's dividend cut is unrelated to the economic impact of the pandemic. Rather, the reduced dividend stems from a reduction in income after the divestment of Gas Transmission & Storage segment assets. Additionally, D is repositioning itself to become a traditional regulated utility, with a target payout ratio of 65% that would align itself with best-in-class industry peers. 

While the change in D's business strategy appears to be sound, I want to give it some time to materialize and to produce results. There are other (established) regulated utilities to choose from, so I don't see the need to stick with a changing company at this time. 

Here is a chart depicting my opening and closing trades:



D Trade Summary


I first bought shares of D in August 2014 and added additional batches in 2015 and 2016. 

The first two buys were executed in a different account, which I later transferred and combined with my main DivGro portfolio at Interactive Brokers. The closing trade was on 5 November. 

Following is a summary of the trades and the dividends I've received, along with a net profit analysis. First, the trades in my original account:

2014-08-19
Bought 29 shares of D at $69.17 per share:
$
2005.97
2014-09-22
 Dividend on 29 shares at 60.00¢ per share:
 $
17.40
2014-12-22
 Dividend on 29 shares at 60.00¢ per share:
 $
17.40
2015-03-20
 Dividend on 29 shares at 64.75¢ per share:
 $
18.78
2015-06-22
 Dividend on 29 shares at 64.75¢ per share:
 $
18.78
2015-07-07
 Bought 7 shares of D at $70.41 per share:
 $
492.86
2015-09-21
 Dividend on 36 shares at 64.75¢ per share:
 $
23.31
                                               
               

Total Capital Invested:
$
2,498.83

Total Dividends Received:
$
95.67

Next, here are the trades and dividends in the consolidated account:

2015-11-24
Transferred 36 shares of D at $69.41 per share:
$
2498.83
2015-11-24
 Transferred Past Dividends:
 $
95.67
2015-12-21
 Dividend on 36 shares at 64.75¢ per share:
 $
23.31
2016-03-21
 Dividend on 36 shares at 70.00¢ per share:
 $
25.20
2016-06-20
 Dividend on 36 shares at 70.00¢ per share:
 $
25.20
2016-08-09
 Bought 64 shares of D at $74.86 per share:
 $
4,790.80
2016-09-20
 Dividend on 100 shares at 70.00¢ per share:
 $
70.00
2016-12-20
 Dividend on 100 shares at 70.00¢ per share:
 $
70.00
2017-03-20
 Dividend on 100 shares at 75.50¢ per share:
 $
75.50
2017-06-20
 Dividend on 100 shares at 75.50¢ per share:
 $
75.50
2017-09-20
 Dividend on 100 shares at 75.50¢ per share:
 $
75.50
2017-12-20
 Dividend on 100 shares at 77.00¢ per share:
 $
77.00
2018-03-20
 Dividend on 100 shares at 83.50¢ per share:
 $
83.50
2018-06-20
 Dividend on 100 shares at 83.50¢ per share:
 $
83.50
2018-09-20
 Dividend on 100 shares at 83.50¢ per share:
 $
83.50
2018-12-20
 Dividend on 100 shares at 83.50¢ per share:
 $
83.50
2019-03-20
 Dividend on 100 shares at 91.75¢ per share:
 $
91.75
2019-06-20
 Dividend on 100 shares at 91.75¢ per share:
 $
91.75
2019-09-20
 Dividend on 100 shares at 91.75¢ per share:
 $
91.75
2019-12-20
 Dividend on 100 shares at 91.75¢ per share:
 $
91.75
2020-03-20
 Dividend on 100 shares at 94.00¢ per share:
 $
94.00
2020-06-18
 Dividend on 100 shares at 94.00¢ per share:
 $
94.00
2020-09-21
 Dividend on 100 shares at 94.00¢ per share:
 $
94.00
2020-11-05Sold 100 shares of D at $83.36 per share:$8,336.00
                                               
               

Capital Gain:
$
1,046.37

Dividends Received:
$
1,595.88

Commissions/Fees/Taxes:
$
8.20
Net Gain: $2,634.05

I made a net gain of 36.1% on the original amount invested, which is a gain of 7.4% annualized.

Selling these shares reduced DivGro's projected annual dividend income by $376.

Concluding Remarks


Dominion Energy sold its Gas Transmission & Storage segment assets and consequentially reduced its quarterly dividend. Generally, I will close my position in any dividend growth stock that cuts or suspends its dividend. While I made exceptions for cuts and suspensions due to the economic impact of the COVID-19 pandemic, D's cut stems from a strategic change in the company's business. As a result, I closed my position in D and will replace the lost dividend income by investing in suitable replacements. 

I would like to give Dominion Energy some time to execute its new plan, which involves repositioning itself as a pure-play, state-regulated utility with increased cash-flow stability and higher dividend growth in the future. Perhaps I'll revisit the stock in the future. Meanwhile, I'm thinking about selling deep out of the money puts to collect options income.

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