Investing: Part Three

This brings us to the third issue most often asked about, “when do I sell”.  The answer is a tough one because every situation is different, so it requires constant updating. 

We divide stocks into 2 groups.  First, those stocks bought with the intention to holding them for years or even decades.  Why would one want to sell shares in a company that generates a good return on investment year-over-year?  These are companies that have a history of raising the dividend.  Most successful investors like Warren Buffett practice this technique, as do we.  

Most of our suggested holdings fall into this group.  For paying subscribers only  is up over 700% since 1991 and has raised the dividend for 41 consecutive years.  Plus, it has paid at least one 25 cent extra dividend.  Based on its first quarter earnings, the company will probably raise the dividend in January.  The company has a lengthy history of earnings that are consistent and reliable, so why would one want to sell the stock?  Today the dividend yield is 6.5% based on our purchase price.  For those who bought in 1991, when my father’s newsletter first suggested buying, the yearly yield is now 16% based on the first recommended purchase price. 

The second group are quality shares to hold for a shorter period, usually no longer than a few years, with the intention to realize a capital gain.  These stocks are most often described as cyclical meaning you have to wait for the stock to correct and then buy it, and then hopefully sell during the next upswing.  These companies should pay a dividend to reward the investor while holding, but rarely do they increase it.  One of the biggest companies listed on the TSX is Empire Life.  It has paid the same 50 cent dividend for close to three decades, but the share price does not increase as fast as those that increase their dividend.  These shares should be bought when the dividend yield is trading below its historical average and then sold once the dividend yield climbs above its average.

What signs are required to eventually put a sell on a long term hold?  One, if there has been no dividend increase in 2 years.  This is generally a sign the gravy train is over.  We recently suggested unloading Husky Energy at $32 and Great West Lifeco(GWO) at $28.  Both do not have a great record of raising their dividends.  When GWO does, it usually is by a penny or so, this is not enough to justify holding it over the long-term.  Both are quality companies but with limited upside potential.  We will probably suggest rebuying them both in the next down market. 

The second sign we look for is poor stock performance.  Every company has negative quarters.  This should be expected.  But, if these quarters start to occur more often it is time to revaluate the shares.  This change in direction is most often created by poor management or a troubled industry.

Sometimes you may have to sell stock to free up cash for reasons other than investing and when this occurs many investors tend to have a hard time deciding which one to sell.  My father (Brian) and I have somewhat varying views when it comes to answering this question.  It depends on the person.  Brian tends to favor selling some of his largest holdings in order to even out the portfolio weightings.  He recently had to free up some cash and sold some of his shares in for paying subscribers only.  Unfortunately, the price jumped by $3 per share shortly after.  His decision was based on the fact that the holdings in the stock had grown to 51% of the portfolio.  The negative outcome of this sale is that a hefty capital gains tax will ensue.

In 90% of cases (for paying subscribers only excluded), I prefer to sell a losing stock, or if one does not exist, the worst performing one because I hate seeing a loss on my portfolio statement and it triggers a capital loss.  The tax loss can be carried over until capital gains are triggered.  Furthermore, I feel selling a well performing stock creates opportunity costs and it does not bother me to have one holding growing to a majority of my portfolio.  My view is less conservative than Brian’s. Therefore, if you prefer to be on the cautious side one should favour my father’s strategy