When to Sell Stock





When investing in stocks, knowing when to sell shares is frustrating, and very difficult to do well consistently.   The key word here is “knowing”.   Knowing is a fallacy.   Once you realize it’s impossible to always sell stocks at optimum points in time, creating a sell strategy becomes much easier.

In my own personal experience, the difficulty in determining when to sell an investment is the primary reason I’ve adopted a dividend growth strategy, where a stock sale is a rare occurrence.   What if the most important rule of your sell strategy was to never sell the investment?  If you buy shares in a company with the intention of never selling them, then the buying criteria becomes the most important first step of your sell strategy.

Here’s my sell strategy – it starts with several buy rules.  Stocks I buy meet at least four out of the five requirements:

  • Buy companies that provide necessary goods and services for everyday living.   Examples include food companies, utilities, waste disposal, household goods, and oil.  My favorites include General Mills, American Water States, Waste Management, and ConocoPhillips.
  • Buy companies that provide highly desirable or addictive consumable products.  I love drinking Dr. Pepper.  The only way I can experience the taste again after finishing a can is to buy another one.
  • Buy companies that are leaders in their industries with strong brand names.  Think chocolate = Hershey’s and cell phones = Apple.
  • Buy “shareholder friendly” companies.   This is characterized by a long-term history of raising dividends and having a balance sheet that shows growing amounts of treasury stock. Treasury stock are shares of stock bought back by the company, reducing the amount of outstanding shares on the open market.
  • Buy companies led by great people with a vested interest in the success of the company.  Look for high insider ownership of stock and leaders that possess a prior history of success.

After buying a stock that meets the above characteristics, here are the sell rules:

  • Sell the stock if the company cuts the dividend.   All companies go through painful economic downturns and competitive market challenges.   The great companies, the ones worth holding on to, are those that can weather the storms and still maintain or continue to grow their dividends through tough times.
  • Never sell the stock as long as the dividend yield stays within the range of x and y.  With each stock, I establish low (x) and high (y) dividend yield figures, values at which I would consider either selling or buying more shares.   For example, if a stock experiences a significant run-up in price, the dividend yield will fall, and it may be a good time to take some profits and move the proceeds into a different investment.   I establish low-yield sell figures at extreme points – outside of a normal range, to make it difficult to sell the position.   However, occasionally an opportunity arises when a stock’s price has risen abnormally high.  During these over-valued situations, I’ll consider selling some or all of the position, especially if an alternative buying opportunity presents itself.  Be sure to check back next week for my post: How to Add Buy Sell Alerts to Investment Spreadsheet, to learn how you can create a column in your spreadsheet that will help you see opportunities to sell over-valued stocks and buy other under-valued positions.

That’s it – only a couple of sell rules, designed to minimize selling in the first place and keep me invested for the long haul in quality companies with stable, growing dividends.

Disclosure:  This article is not intended to provide specific recommendations to buy or sell securities.  The author holds long positions in GIS, AWR, WM, COP, DPS, HSY, AAPL.

 

4 Comments

  1. mpratland

    Interesting strategy – I’ve seen this echoed by the likes of some successful investors throughout time. What do you do about the tax consequences of the dividend strategy? Do you have any suggestions for resources about the tax implications of following this strategy in a non-retirement account?

    Reply
    1. Meter ManMeter Man (Post author)

      Thank you for the comment. Personally speaking, most of my investments are held in tax-deferred accounts (Two IRA rollover accounts and a Roth IRA), so tax implications aren’t a big concern for me yet, especially during my current “accumulation” phase of investing. However, in my taxable brokerage account, is where I tend to buy stocks with lower dividend yields to minimize taxes on dividend income. In general, a stock sale will be a rare event for me, as I use dividend yield trigger points at levels of “irrational exuberance”. Eventually, I’ll adjust my Dividend Meter spreadsheet into two separate sections and two meter gauge charts to provide a clearer picture of tax-deferred and taxable assets.

      Reply
  2. David45

    I recently discovered the Reality Shares web site and found lots of helpful information for dividend investing. Here is a link: http://www.realitysharesadvisors.com/divcon/

    It seems to me that using the DIVCON (Dividend Condition) ranks and scores would improve stock selection.

    David

    Reply
    1. Meter ManMeter Man (Post author)

      Hi David,

      Thank you for the comments and useful link!

      -Meter Man

      Reply

Leave a Comment

Your email address will not be published. Required fields are marked *