When to Sell a Dividend Stock – Part 1

Dividend Investing, Income Investing

New Dividend Hunter subscribers often ask about my criteria for selling a stock. Most are looking for some percentage loss or gain on a stock as a trigger to sell. I stay away from any rules not based on the underlying fundamentals of each recommended investment.

Here’s what I do instead…

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. Over eight years of Dividend Hunter investing, there has been about an equal 50/50 split between stocks sold for a profit and those on which we took a loss.

The reasons to sell fall into three distinct categories. I will cover each reason in a separate article. Today, I will start with the easy one, and usually the most profitable. Unfortunately, it is also the rarest.

As soon as one of the companies 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.

So, when there is a buyout offer, I am out of the stock and recommend the same to my Dividend Hunter subscribers. For example:

The 2021 buyout of MGM Growth Properties (MGP) by VICI Properties Inc (VICI) was one of our most recent sales. MGP was a very nice dividend growth stock, and I was sad to see it go.

One of my all-time favorite dividend growth stocks, Aircastle, Ltd., was taken private in 2019. This stock traded for less than $3.00 per share in 2009 and was bought out for over $32.00 per share. And the company had paid nicely growing (10% per year) dividends.

One other corporate action also usually deserves an immediate sell recommendation: when a company spins off part of its business into a new stock. One recent example was the spin-out of what became Warner Brothers Discovery (WBD) by AT&T (T). At the time, I recommended hanging onto both stocks. I was curious as to how it would work out. It didn’t work out well, and we ended up selling both at share prices significantly lower than those in effect at the time of the spin-out. The lesson learned is that waiting and hoping is not a good strategy.

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. The good news is that buyout offers usually provide a very nice pop to the share price, letting us sell for a profit.