When to sell dividend paying stocks

[aja8888]

No, just because the stock went up in price that had no effect on your 6% dividend. Sure, it's lower for those buying it now, but your dividend yield hasn't changed.

It has no effect on the monetary amount of the dividend, but with respect to the current stock price (if it rises), it sure has percentage-wise.

 

[redduck]

Just buy dividend oriented ETF and you never have to worry about answering this question.

I like it simple.

Yeah, but the real trade-off is having to give up all the angst that comes with dealing with individual dividend stocks. Why would someone want to give that up?

 

[MRG]

Yeah, but the real trade-off is having to give up all the angst that comes with dealing with individual dividend stocks. Why would someone want to give that up?

Right, people pay good money for mental masturbation.

There are some big gainers too. All the divy equities I've purchased are up, some 40% or more in a year. Has any divy ETF done that?

 

[garyt]

You can agree with it if you want, but it won't help you in making a good financial decision.

Consider this, all else being equal (hypothetical spherical chickens in a vacuum scenario):

You bought a stock @ $10 and it pays a $0.60 annual dividend (6%). Sometime later, the stock rises to $20, still paying a $0.60 annual dividend. If you invested $10,000 originally, you get $600 annual divs. The stock would now sell for $20,000.

You can measure your dividend % on the original purchase price at 6%, or at the current price and get 3%.

Now lets say you can buy another stock with similar outlook, that pays a 5% dividend at its current price. If you consider you are getting 6%, you won't trade stocks. But you could get 5% on your entire amount if you traded. So the new stock would provide 5% on $20,000, which is $1,000 annual div.

$1,000 is more than $600. Looking at a yield based on original purchase price, rather than current alternatives clouds your thinking, and would cost you $400 a year in this example.

-ERD50

Nothing happens in a vacuum, though. You just can't answer the question without the OP naming the stock he plans to sell and the one he'd buy. The one he has now seems to be a good stock due to the run up, assuming the run up was based on good fundamentals. So he sells that and buys the
3%er. Six months from now, it cuts it's dividend and of course the price will fall. Now you're getting a smaller dividend AND your out money cause the price fell.

 

[ERD50]

Nothing happens in a vacuum, though. You just can't answer the question without the OP naming the stock he plans to sell and the one he'd buy. The one he has now seems to be a good stock due to the run up, assuming the run up was based on good fundamentals. So he sells that and buys the
3%er. Six months from now, it cuts it's dividend and of course the price will fall. Now you're getting a smaller dividend AND your out money cause the price fell.

Of course. I was speaking in generalities, and hypothetically, hence my comment: "Consider this, all else being equal (hypothetical spherical chickens in a vacuum scenario):"

The spherical chicken/vacuum reference is the punchline of a long joke about a theoretical physicist and a chicken farmer - to solve such complex problems, other variables are eliminated to the extent they can be. Spheres are the simplest 3D shape, and a vacuum eliminates the effects of air resistance, etc.

So no, we cannot know, even (especially?) if he named the stock. But if he thinks it may go back down, he could (using the numbers in my example) use the funds to purchase what he thinks to be 'safer' stocks, that are paying say, 4% instead. Then he's making 4% on twice as much money as he was making 6% on (or compare to a 3% on the current NAV). So even if the assumed safer stocks drop to 75% of their vale, he's at the same point.

I'm not offering any buy/sell advice - just offering information on how to view the issue. And I stick to my earlier point - calculating div yield on the purchase, rather than current price (taking any taxes into account), isn't helpful.

-ERD50

 

[tcaron20]

Thanks for the responses. I am looking at this from a present value vs. a future value of the dividends received over 5 years.
Immediately grabbing the gain or future money today gets you the dividends now for reinvestment thereby leveraging the gain advantage to increase the overall performance.

Just a different way of looking at it?


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[target2019]

Also a good idea to calculate yield on cost (YoC) to evaluate.

The importance of yield on cost - Dividend Growth Investor

 

[garyt]

Of course. I was speaking in generalities, and hypothetically, hence my comment: "Consider this, all else being equal (hypothetical spherical chickens in a vacuum scenario):"

The spherical chicken/vacuum reference is the punchline of a long joke about a theoretical physicist and a chicken farmer - to solve such complex problems, other variables are eliminated to the extent they can be. Spheres are the simplest 3D shape, and a vacuum eliminates the effects of air resistance, etc.

So no, we cannot know, even (especially?) if he named the stock. But if he thinks it may go back down, he could (using the numbers in my example) use the funds to purchase what he thinks to be 'safer' stocks, that are paying say, 4% instead. Then he's making 4% on twice as much money as he was making 6% on (or compare to a 3% on the current NAV). So even if the assumed safer stocks drop to 75% of their vale, he's at the same point.

I'm not offering any buy/sell advice - just offering information on how to view the issue. And I stick to my earlier point - calculating div yield on the purchase, rather than current price (taking any taxes into account), isn't helpful.

-ERD50

I cant argue with your point, it's solid. But if he names both stocks people can at least give him an opinion on the two stocks and their future returns. Say he's sitting on a big gain on CMG Chipotle (they don't pay a div, but let's assume they did) we could say sell because the run up has gone past their future growth, the PE is out of this world high, the ecoli scare has hurt sales, etc. Take the money and run.
Suppose he wants to buy JNJ, we can say they sell products that are in demand no matter the economy, the valuation is better, they have a long history of increasing the div, etc go buy it.
Without any of this info the question is meaningless. Only quoted you as a way into the conversation.

 

[Danmar]

Also a good idea to calculate yield on cost (YoC) to evaluate.

The importance of yield on cost - Dividend Growth Investor

Again, I think the yield on cost is of little use. Agree, that it is really important that a stock increases its div. But the yield on cost is primarily driven by when you bought the stock so is of little use as long as it is increasing, as it will if divs increase. I think div growth rates are a much more important metric.

 

[timemoveson]

To build on the "CMG Chipotle" example (let's call it Stock A).

1. If Stock A's current yield now falls below his threshold level because the price has run up, he has a good problem. If the payment stream in dollars is still sufficient, the overall risk is manageable, and he is confident about the future for dividend growth and dividend sustainability, he might be inclined to hold Stock A indefinitely. If one or more of those are not true, that is a reason to consider harvesting the gain and investing his capital differently. See #3.

2. If the gain in Stock A is so material it might be called a home run, this might trump the other considerations (at least it might for me). After all, there are many fish in the sea with good or very good attributes for dividend investors. People with individual stock portfolios look for outliers with which to take advantage of up and down price movements. That is the whole point of having this type of portfolio IMO.

3. In more general terms, barring a home run in Stock A, If Stock B (a different dividend paying stock that matches his dividend stock investment current criteria) is clearly superior to Stock A in one or more of his criteria, he might very well choose to sell Stock A, harvest the gain, pay the tax, and invest in Stock B.

4. Assuming the criteria used to originally purchase Stock A and now consider Stock B are the same (or very similar), I think he is making a fair comparison and it is apples to apples.

 

[ERD50]

I cant argue with your point, it's solid. But if he names both stocks people can at least give him an opinion on the two stocks and their future returns. ...
Without any of this info the question is meaningless. Only quoted you as a way into the conversation.

I'd say it is two different conversations, and some people are mixing them together.

I see the OP as a general question of if/when to sell after a run up. He did't mention or ask about the specific company. Then the discussion turned to one about whether a dividend should be calculated on the purchase price, or the current price. That is general as well.

I'd suggest that if the OP really wants input on the opinions of the future outlook of a particular stock, he'd probably be better off starting a new thread and naming the stock. This one has split and drifted from that topic (and never really was about that anyhow, that I can see).

Again, I think the yield on cost is of little use. Agree, that it is really important that a stock increases its div. But the yield on cost is primarily driven by when you bought the stock so is of little use as long as it is increasing, as it will if divs increase. I think div growth rates are a much more important metric.

Excellent point - allow me to expand on that a little:

The decision to hold or sell an investment should be based on assumptions of future returns. Picture two investors who each hold the same amount (and % of their portfolio) of a liquid, openly traded stock (in a tax deferred account to take cap gains taxes out of the picture for now). Is there any way you would tell one of them to hold, and one of them to sell? How could that be justified? Either the stock is seen to do well in the future, or it isn't. The future is all that matters.

Maybe one bought the stock at $10, and the other at $20. It makes no difference regarding any current sell/hold recommendation. None at all.

Maybe the stock saw a big run up to $100. But if you think that makes it risky, it is just as risky to the person who bought 1000 shares at $10 as the person who bought 1000 shares at $20. They both currently have $100,000 'at risk'. No one is 'playing with the house money', it is their money now.

-ERD50

 

[kcowan]

I think div growth rates are a much more important metric.

I recall a study that showed the 10 year track record of dividend growth making common stocks higher yielding than preferreds from the same group of companies.

Does anyone know of such ongoing studies on common stock rates of dividend growth?

 

[Running_Man]

If you are going to purchase an individual stock you should know in advance the reasons for which you would sell. For myself I do not hold onto a stock if the dividend yield falls beneath 1.5% yield for the next 12 months. My intention is to buy all stocks with a dividend yield over 2.0% so I would not sell on a short term blip up, I also review the financial statements and will sell if a company does not increase the dividend yield as expected. If a stock is in an industry that I forsee major problems for in the coming 1-2 years such as oil in late 2014 then I sell the stocks in that industry unless I really think the problems are unlikely to affect the stock. Through these rules I have held onto VFC for very large gains while at the same time selling Hormel for a switch in Accenture which then I sold for a switch to Lockheed Martin.

A six percent yield is a high yielding stock that, without knowing what the stock is in is most likely a bit more speculative than I would like.

 

[target2019]

Again, I think the yield on cost is of little use. Agree, that it is really important that a stock increases its div. But the yield on cost is primarily driven by when you bought the stock so is of little use as long as it is increasing, as it will if divs increase. I think div growth rates are a much more important metric.

Yes, that ground and more was covered in the additional links articles. I noticed a when to sell article in the links.
I use fastgraphs for monitoring the ongoing and past. YOC is important to some.

 

[Dash man]

Each individual company stock needs to be evaluated individually looking at the fundamentals, including finances and prospects for future growth, dividend growth and ability to sustain the growth. If you find a stock that you believe will do better than one you own, including consideration of tax consequences, then go for it. If you just chase dividends without the homework, you'll get what you deserve.


Enjoying life!

 

[tcaron20]

Thanks everyone. Ok the stock is BNS - Bank of Nova Scotia.

As rates go up a bank, especially a community bank like BNS, funds their assets or loans with CDs, etc, which reprice up faster than than the loans or income source. When rates move higher lending generally dries up and you are stuck with lower yielding loans as your deposit rates, or cost of funds goes higher. This decreases the income spread or net margin.

Large national banks fund their loans with low cost business deposits that they generally pay little to no dividend. Basically their cost of funds is zero thereby they are not rate sensitive.

Make sense?


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[target2019]

On seekingalpha, an article just was published, and has commentary that may interest you.

Why Investors Should Be Cautious Of Bank Of Nova Scotia - The Bank of Nova Scotia (NYSE:BNS) | Seeking Alpha

You need a free account to read entirety.

 

[Running_Man]

Thanks everyone. Ok the stock is BNS - Bank of Nova Scotia.

As rates go up a bank, especially a community bank like BNS, funds their assets or loans with CDs, etc, which reprice up faster than than the loans or income source. When rates move higher lending generally dries up and you are stuck with lower yielding loans as your deposit rates, or cost of funds goes higher. This decreases the income spread or net margin.

Large national banks fund their loans with low cost business deposits that they generally pay little to no dividend. Basically their cost of funds is zero thereby they are not rate sensitive.

Make sense?


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Banking in Canada is quite different than banking here in the United States, it is much tighter controlled and there is far less competition. The biggest risk for Bank of Nova Scotia is the overpriced real estate in Canada and the oil collapse. The positives are pretty much everything else. It is a well funded and supported dividend, very unlikely to be cut other than if another financial crisis were to hit the stock market. It’s safety rating by Value Line, which I trust very much was raised to a “1” it’s highest rating in November of 2014, it is an “A” in financial strength and top rated for Earnings Predictability and Price Stability. It is slightly below average in growth and with the recent oil troubles will be a slow grower for a while yet. It is unlikely to have upside surprises but I also think the dividend is rock solid and should increase for years to come at a 8 percent rate. Until something in the financials changed that is what I would go with if I had purchased the stock and would set my sell point today at $192.00 as a price I think would be too high and monitor the financials for any changes that I think would be adverse that I do not see at the present time. Some of these would be : a renewed collapse in oil prices, a major decline in Canadian real estate, a lack of an expected dividend increase ---or a decrease in the safety or financial strength rating by Value Line or a drop in timeliness by Value Line to 4 or lower. Other than that I would hold this stock until I died.

Bank of Nova Scotia has a long history of increasing the dividend every year and just raised to .72 cents with the last dividend. I would not sell. This of course is just some guy on the internet’s opinion your opinion is far more valuable

 

[Running_Man]

My expectations, if I were to actually be holding this stock would be for the dividend to be increased in the coming 5 years to the following amounts
2017: 0.77 per Qtr
2018: 0.83 per Qtr
2019: 0.89 per Qtr
2020: 0.95 per Qtr
2021: 1.02 per Qtr

As the 5 years passes I would expect Bank of Nova Scotia to then have a stronger potential growth and revert to closer to a 3.5% dividend yield and would look at the stock price as being near 117 in 2021.

With these figures in mind when you listen to quarterly conference calls you can discern if management is in agreement or even more aggressive than you expect, if a note of pessimism sounds that is when you have to earn your portfolio by determining if their outlook is a cause for you to sell. That is what I do and I take notes on the calls versus what I expect.

 

[tcaron20]

Thanks "target.." For the alpha article. I am a community banker and have been in the business for over 40 years. I do believe that another RE bust is coming. Canada has had a nice run but their bad loans are increasing. Might sell with a second look after it adjusts in price if ever.

Thanks!




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[target2019]

Thanks "target.." For the alpha article. I am a community banker and have been in the business for over 40 years. I do believe that another RE bust is coming. Canada has had a nice run but their bad loans are increasing. Might sell with a second look after it adjusts in price if ever.

Thanks!

SA has enough noisy articles, but that one had sufficient research, I felt. It sounds like you agree with upcoming adverse events prognosis.

 

[rayinpenn]

The time to sell a dividend stock? Never. Timing the market is a fools game.

Warren Buffet said something to the effect of "I but a great stock at a good price and I hold it forever?" I too haven't sold anything in years and years...why would I? I've lived through the credit crisis and every downturn guess what I bought more...


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[Danmar]

Thanks everyone. Ok the stock is BNS - Bank of Nova Scotia.

As rates go up a bank, especially a community bank like BNS, funds their assets or loans with CDs, etc, which reprice up faster than than the loans or income source. When rates move higher lending generally dries up and you are stuck with lower yielding loans as your deposit rates, or cost of funds goes higher. This decreases the income spread or net margin.

Large national banks fund their loans with low cost business deposits that they generally pay little to no dividend. Basically their cost of funds is zero thereby they are not rate sensitive.

Make sense?


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No this does not make sense. It is well understood by the market that if short term rates rise, the banks will increase floating rate loans faster than they will increase core deposit rates. Margins are at historically low levels due to the historically low short term rates. This is true in both Canada and the US. Increased rates will help bank margins and thus profits.

I also own BNS ( and other CDN banks) and it has done well recently. Probably a bit of a catch up because they had performed poorly (compared to other Canadian banks ) over the past several years. There is some concern because they have a very high exposure to the oil and gas business and other commodities through their South American banks. Still it has been a great div grower over decades, as have the other Canadian banks. My personal view is that they are better to buy and hold than to trade.

They report their third quarter results early tomorrow morning. The other 4 big banks reported last week and all exceeded expectations.

 

[Running_Man]

The time to sell a dividend stock? Never. Timing the market is a fools game.

Warren Buffet said something to the effect of "I but a great stock at a good price and I hold it forever?" I too haven't sold anything in years and years...why would I? I've lived through the credit crisis and every downturn guess what I bought more...


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Warren Buffet sold Johnson and Johnson, Procter and Gamble
Why Warren Buffett Just Sold his Entire Stake in Procter & Gamble Co. -- The Motley Fool
he sold shares in oil stocks
Why Did Warren Buffett Sell $700 Million in Oil Stocks? -- The Motley Fool
Buffet in 2010 sold Home Depot missing the 300 percent rise after holding for quite a while, he sold Nike in 2011 missing the huge runup and the addition to the DJIA.

 

[Running_Man]

Well interesting update to this thread as Bank of Nova Scotia has increased to 80 from 65 when the thread began - 23% increase along with 3 dividend payments for a return of 27 percent. This is because with the recovery in oil prices one of the only two negatives for the stock has been removed, so now it is trading at a 3.69% dividend yield close to the 3.5% dividend yield I would expect for a stock of this quality. So going forward with an eight percent growth and 3.69% dividend a long term return expectation of 11-12 percent seems reasonable. Still looking for 117 in 2021.