When to Sell Dividend Growth Stocks
The dividend growth stock investing strategy is a long term approach to investing. Dividend growth investors are looking towards long term goals of retirement and financial independence. We want to create a stream of passive income from dividends that will continually pay us enough to meet our future living expenses. So typically when you are buying a dividend growth stock the plan is to hold that stock for a very long time if not forever. However, just because the goal is usually long term does not mean investors can buy stocks and forget about them. You must always monitor your investments and because change happens frequently you may even have reason to sell off some of your investments.
Reasons to Sell Dividend Growth Stocks
When investing in dividend growth stocks it is important to monitor your investments for the following situations to determine if it might possibly be time to sell one of your stocks and invest in a different opportunity. I try to monitor my stocks quarterly to determine that they are still good investments for me going forward.
Change in Fundamentals – The companies we choose to invest in as dividend growth stocks should display certain quality fundamentals such as growing revenues/sales, net profits and earnings per share. It is important to monitor your stock holdings to make sure the company is still meeting these expectations of growth. If a company slows down in it’s EPS growth you need to analyze the reason for this. Is it a short term set back such as poor economic conditions where the company is likely to bounce back or is it a bigger problem such as out of control expenses or decreasing market share that could indicate a downward spiral for the company’s profitable in the upcoming years. Get an idea of why the fundamentals are changing and decide if this is only a temporary set back in which this could provide opportunity to purchase more shares at a lower price or if the changing fundamentals indicate larger problems for the company where you may be better off selling your ownership and investing elsewhere. Be sure to keep an eye on key fundamentals such as earnings growth, sales growth, expense levels and debet levels.
Failure to Increase Dividend – One of the main components of our dividend growth strategy is a dividend that increases each year. We look for companies that have shown a commitment to shareowners by giving them a rising dividend income payment year after year. This helps us reach our goal of financial independence through passive income as well as helping our income level keep pace or even outpace inflation. Sometimes management will decide not to increase a dividend payment. For me this is a sell signal. This either indicates that management is unsure about the companies future abilities to meet dividend commitments or management has changed it’s philosophy on distributing earnings of the company to it’s owners. Either way I am not a fan. I want my companies to pay ever increasing dividends year after year. If they fail to do this I will sell and look for other investments. There are plenty of companies paying annually increasing dividends that you do not have to waste your time on the ones that don’t.
Decrease of Dividend – If a company decreases thier dividend this is a huge red flag. Typically management will try to avoid decreasing dividends because the bad news will negatively impact thier stock price. However if bad times are coming management will do what is necessary to save the company. This will mean retaining more of thier earnings to try to help get through tough times. A decrease in a dividend either means tough times are ahead or they are already here for the company. Either way I take this as a sell signal and look for better investments to put my money into.
Major Overvaluation of Stock – Sometimes the stock market gets a little carried away and companies stock may be grossly overvalued. We saw this during the dot com bubble. When we see P/E ratios growing higher than historical averages this is a signal that a company is getting overvalued. This could be because the market as a whole is getting overvalued or for one reason or another a certain company is garnering a lot of interest driving up it’s stock price. As a dividend growth investor I am typically not too concerned about overvaluation of a company I own. I figure as long as the company keeps growing earnings and dividends it is doing what I bought it to do. However, when I believe a company I own is majorly overvalued I will consider selling. What do I consider major overvaluation? I will begin to look at a company I own as a possible sell if it’s P/E ratio creeps up past 30. At that point I will look for other possible investments that are more reasonably priced. A more reasonably priced company will give me better chances of future growth compared to an overvalued company. However, if I can’t find any better priced opportunities then I will consider holding the stock or selling and keeping my money in cash.
Realize a Mistake Was Made – As investors we have our strategies and we have our investment rules to follow. However sometimes we stray from those investment guidelines and we make an investing mistake. If at any time you are evaluating your stock portfolio and you don’t understand why you purchased a company then maybe you need to realize you made a mistake. Sometimes we can get a little carried away and excited about a company causing us to miss certain bad signals that possibly would have kept us from investing in the company. If you make a mistake it is important to accept the mistake and fix it. Sell the company stock and look for a better investment that fits in with your dividend growth strategy.
These are the 5 reasons I would sell one of my stocks. If you realize the reasons you had in purchasing the company in the first place have changed then it may be time to sell. Look for better investment opportunities using your investing strategy. There is a vast universe of stocks out there with many stocks meeting our requirements for dividend growth. Don’t fail to notice when it is time to move from one stock onto another that may offer better future returns.