Wednesday, January 16, 2013

Selling Decisions

The toughest investment decision for a buy-and-hold investor like me is when to sell. The constant flow of dividends trickling into my portfolio, even from poor performing stocks, makes the decisions even harder. Afterall, even some of my weaker performing stocks have excellent yields that boost my overall portfolio return (i.e. Transalta at 7.3% and Power Financial at 5.1%).

Peter Lynch indicated in one of his books that you should hold onto companies so long as the story hasn't changed since you invested, and you still believe in your investment decision. Although I generally think this is good advice, for me, it's the philosophy behind the story that has changed. For instance, as previously indicated, when I used to follow the 'Dogs of the Dow' theory, I would look for  very high yielding stocks that had stable operating and financial performance. Transalta was one of those stocks. Although, I don't feel Transalta's dividend is in any real danger of being cut,  I also don't think they'll be raising it any time soon given changes in their industry.

Another stock I've been debating about selling lately is Canadian Western Bank. I bought CWB in 2009 when I was looking for lower yielding dividend stocks with a history of fast dividend growth (supported by strong cash flow generation). CWB continues to fit those parameters given their 70% dividend growth in the last 5 years, which has been supported by earnings growth, and a relatively low payout ratio (about 30%). My issue is that given the current dividend yield of 2.3%, I could easily double the dividend yield by investing in a larger, more established bank. The fact that CWB is held in my taxable portfolio also complicates matters, as I'd have to pay taxes on 50% of the capital gain I've achieved by holding CWB the last four years.

Decisions to sell are clearly complicated, but I come back to one of my goals for 2013: selling stocks with dividends that are stagnant at a certain level. Being a dividend growth investor, I can't be happy with companies that can't afford to increase their dividends, or choose not to pay higher dividends. Not being able to raise dividends or choosing not to are both unacceptable excuses given the large number of companies who make it a practice to increase their dividends regularly as their income and free cash flow grow. Those are the companies I wanted to be invested in for the long-term.

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