Know When to Hold ’em, Know When to Fold ’em, Know When to Walk Away…
A friend mentioned some of the Arizona casinos are now offering live craps. I told her I’d taken craps lessons, and love the game.
She began probing, “What is the biggest lesson you learned?” My answer – “When to quit.” The lessons were not only when to take profits, but also when to walk away and cut your losses.
I found it harder to walk away when I was doing well. A casino dealer once said, “If they wanted less, they’d go home with more.” I’ve seen people put $20 in a quarter slot machine, be up several hundred dollars, and continue pulling the handle hoping to hit the big jackpot – until all their money was gone. Forget the jackpot, consistent profit is the goal.
The next morning Tim Plain, Editor of the Dividend Hunter, released the first part of a series of articles, “When to Sell a Dividend Stock.” Tim discusses his factors in selling both winners and losers.
I asked him to elaborate.
DENNIS: Tim, thank you for taking the time to help educate our readers.
One chapter in my craps lessons was avoiding “sucker bets”; trying to hit big payouts while the odds are really stacked against you.
Let’s discuss your strategy for buying stocks you feel have great potential gains.
You said:
“The Dividend Hunter strategy primarily focuses on generating a stable and growing high-yield income stream. I do not include capital gains in my return expectations. When I add a new stock to the recommendations list, I expect the investment to be a long-term position, paying quarterly dividends, year after year.”
I remember the days when certain stocks were called, “Widows and orphan stocks.” They were bought for dividends, and many were held for generations.
Every time we go to Costco, it’s packed. Certainly, their business should do well in tough times. Their stock is almost $500/share and they pay less than 1% in dividends. Looks like a great business, but a high-risk investment in today’s market.
Tim, can you elaborate on how you find those opportunities that meet your criteria?
TIM: There is no EASY button. There are parts of the stock market that traditionally pay higher yields. These groups such as Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs) operate as pass-through businesses and by law must pay out most of their net income as dividends.
I review lists of new dividend announcements every week, looking for high-yield opportunities. When I see a potential opportunity, I dig in and see if it meets my Dividend Hunter criteria.
I also get stock ideas from many of my highly-engaged subscribers. There are several investments in the Dividend Hunter recommended portfolio that were first brought to my attention by a subscriber.
DENNIS: My craps rules were clear about when to quit. Do you have any clear rules for when you might sell a stock?
TIM: For me, most decisions to sell are based on a fundamental change in the financial status of the investment.
Over the years, I have found that the annual portfolio turnover for the Dividend Hunter portfolio averages about 25%. To me, with a buy-and-hold investment strategy, that number seems high, but it is surprising how the investment outlook for companies can change, and how much we have to stay on top of things.
One hard rule for me is if a company suspends dividends, I will recommend selling.
Also, as soon as a holding in the Dividend Hunter portfolio gets a buyout offer, I recommend selling that stock.
When a buyout gets announced, there is always a nice gain for the share price. Then the share value typically goes “stagnant” while investors wait for the merger to close. It’s rare for anything good to happen during the waiting period, and it is possible for the deal to unwind, which would hurt the share price.
Another corporate action usually deserves an immediate sell recommendation: when a company spins off part of its business into a new stock.
Strange things can happen with corporate actions, such as mergers and spin-offs. History shows that your investment returns are unlikely to improve by holding on. When one of these announcements hits my inbox, I send a sell recommendation to my subscribers. Buyout offers usually provide a very nice pop to the share price, letting us sell for a profit.
DENNIS: I know you prefer to hold stocks for a long period. At what point do you decide to cut your losses and sell a dividend stock?
TIM: I tell my income investors, that falling stock prices are not a reason to sell. A lower price is an opportunity to boost your income. Market declines are a part of stock investing, and if you develop the discipline to buy when prices are down both your income and account value will grow over time.
Instead of basing decisions on share price, it’s an actual threat to the dividend payment that will trigger a sell recommendation.
Occasionally, you can see a dividend cut coming, such as when a company’s profits fall to the point where it earns less than the dividends it pays to investors. At that point, it’s a judgment call whether the business can recover. If it can’t, the dividend will soon be reduced. I usually take the conservative path and recommend selling.
I will sell when the company shows either the inability or unwillingness to continue to pay the dividends I expect. An example would be Six Flags Entertainment Corp (SIX), which suspended its dividends at the start of the pandemic, and has never reinstated the payouts. Prior to the pandemic, SIX paid a growing dividend with an attractive yield. Most of our holdings continued paying dividends through the pandemic. When SIX cut its dividend, we exited our position.
DENNIS: One hard rule for locking in winners was when you double your buy in, walk away a winner and head for home. One time we drove four hours and gambled for 30 minutes. We left grinning from ear to ear. Sounds crazy, but that kind of discipline was required.
It’s hard to sell winners; particularly those that have provided income for a long period of time. You fear missing out on future gains.
How do you know when it’s time to pocket your gains and move on?
TIM: I like to look at relative dividend yields. For example, we owned EnLink Midstream (ENLC) coming out of the early days of the pandemic. In mid-2020 the shares carried a double-digit yield. From there the stock tripled, dropping the yield to around 4%. I knew we could invest in comparable companies with yields in the 6% to 8% range. At that point I recommended selling ENLC.
When selling to lock in gains, I recommend that the proceeds be invested in something with a higher yield. Selling an income stock should always lead to giving yourself a raise when you reinvest the proceeds. Taking profits is fun!
DENNIS: One final question. You mentioned cutting dividends. While you said you sometimes get surprised, that seems to be the rule on Wall Street. You do a good job of spotting suspects well ahead of the market.
I recently wrote about Bed Bath & Beyond (BBBY). They didn’t get in trouble overnight. I’ve often wondered if Wall Street is front-running the market, getting out while advising their clients to stay invested.
I’d love your comments on this…
TIM: Dennis, thanks for the opportunity to address your readers.
When a stock goes down, there is always the question of whether the market is right or I am right to keep the shares and average down. We will never know the motivation behind many recommendations. I read all I can, relying on “real news” such as earnings results and management comments about the company’s prospects.
The Qurate Retail Preferred Shares (QRTEP) is currently receiving a lot of attention from my subscribers. The preferred shares traded near the $100 par value until the company saw a steep drop in revenue and earnings. During 2022, QRTEP dropped to almost $30.
This is a preferred stock that pays $8.00 per year in dividends with a mandatory redemption for $100 in 2031. Those returns are locked in as long as Qurate stays out of bankruptcy. So, I watch this company very closely, monitoring the results of their turn around plan. It can take a couple of years to find out.
I’m not a fan of share buybacks. A buyback should increase the net income per remaining share. When that happens, the company should reward investors by growing the dividends. Share buybacks without increasing the dividends paid is like throwing the money into a campfire.
I know that’s not a widely accepted belief in the financial world, but it keeps us out of stocks that make bad management decisions with their cash.
Dennis here.
After several decades of Fed-induced boom, it’s reasonable to expect a decade or more of bust; meaning everything does not automatically go up. To survive in tough times, investors need to focus on solid, income-producing stocks; while hedging against inflation with metals and metal stocks.
Unlike craps, prudent investing is not totally a game of chance. It’s a win/win for those who do their homework and exercise some discipline.
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On The Lighter Side
For sports fans, there is a lot going on. The Cubs’ home opener is March 30th, college basketball is down to the final four and hockey is about to start their playoffs.
Friend Chuck Butler has often joked that baseball opening day should be a national holiday. There is something exciting about a new season. For Cub fans, hope springs eternal…. Many times, it is snowing and the weather is brutally cold; more like football weather. I’m happy to watch it on TV in the comfort of my family room.
The Cubs broke up the core of their 2016 championship team and there are a lot of new names on the roster. When the PR department is promoting kids in the minors, you know they are rebuilding. Hopefully there will be improvement over last years team.
Our favorite Tampa Bay Lightning should make the playoffs. They won the Stanley Cup in 2020 & 2021. It’s sad to see our heroes aging, a step slower, and not performing up to the level of a couple years ago. It’s inevitable that they will have to start breaking up the team and rebuilding again. Twenty years from now the stars will return, with grey in their hair, and fans will still love them.
Last week I did an interview with Kerry Lutz at the Financial Survival Network. His site is a treasure trove of good information.
Check out my interview HERE.
Quote Of The Week…
“It’s only when we truly know and understand that we have a limited time on earth – and that we have no way of knowing when our time is up – that we will begin to live each day to the fullest, as if it was the only one we had.”
— Elizabeth Kubler-Ross
And Finally…
Subscriber Zeus shares some farmer wisdom from the seat of a tractor:
- Always drink upstream from the herd.
- Good judgment comes from experience, and a lotta that comes from bad judgment.
- Lettin’ the cat outta the bag is a whole lot easier than puttin’ it back in.
- If you get to thinkin’ you’re a person of some influence, try orderin’ somebody else’s dog around.
- Live simply, love generously, care deeply, speak kindly, and leave the rest to God.
- Keep skunks and bankers at a distance.
- Don’t interfere with somethin’ that ain’t bothering you none.
- Timin’ has a lot to do with the outcome of a rain dance.
- A bumble bee is considerably faster than a John Deere tractor.
And my favorite:
- Live a good and honorable life, then when you get older and think back, you’ll enjoy it a second time.
Until next time…
Dennis Miller
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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