The interesting thing about becoming an investor is looking back on some of the stocks you’ve bought and wondering why they were so attractive at the time. Often times, when starting out, it’s easy to overlook certain aspects of the stock or company you are buying. I like doing a constant sweep of my stocks to make sure everything is going well with each and every one of them. Maybe something has changed, or since I bought it they haven’t performed like I would have hoped. Keep in mind, this doesn’t mean I look at stock price dips and dump all the ones that aren’t performing. I tend to monitor dividend increases, earnings per share, and dividend payout ratios to make sure all is still well.
Things tend to change over time, so even if you are implementing a buy-and-hold strategy, like me, that doesn’t mean you should never re-assess your stock picks once you buy them. I would tend to argue that as a beginner investor, you will make some picks that don’t make as much as sense 2-5 years down the road. It’s important to evaluate your picks and adjust where needed. This (hopefully) won’t mean selling off a large portion of your stocks, but little tweaks can provide us stronger growth or safer growth, depending on what our goals are.
This all being said, it the last few weeks, I’ve gone through my portfolio and looked at every stock and made a small note on why I own that particular company. I also looked at the variables I mentioned earlier, payout ratio, earnings per share, and dividend increases. For 2 companies, I carefully thought about why I owned them, examined numbers, and wound up writing “I have no idea”. Not good. So I decided to cut bait, and spread that money amongst stocks that DID serve a purpose in my portfolio. I also trimmed back 3 other positions due to concerns over payout ratio.
The two companies I sold entirely were:
Toronto Dominion Bank (TD): Sure, the stats are okay and that’s why I bought it. I think I first stumbled upon this stock early on when I was reading a lot of blogs that suggested it (red flag #1: Always do your own research). Dividend yield is good at 3.87%, EPS is okay at 2.99, P/E is within range at 12.5, and payout ratio is also okay at 48%. The problem here is the dividend has no consistency and has slowly been cut down by the quarter. It doesn’t instill confidence in me as an investor. Not only are they not increasing the dividend annually, they are taking more and more money out of my “paychecks”. Therefore, I sold my shares on 1/28 at a 4% loss (about $50 down including the dividends I earned). This is a loss of course, and I hate to sell stocks, but they didn’t fit my plan anymore and I could get out while I was within range of even. It was a rookie mistake to buy a stock with a history of adjusting dividends downward. This didn’t end up costing me too much, as the company is pretty stable and consistent aside from the dividend changes. Just remember, if the company doesn’t have a dividend streak (increasing every year), then they have little motivation to pay out a consistent amount. Lesson learned.
Philip Morris (PM): Again, I bought this after reading so many good things about it without doing a full analysis of the numbers. The payout ratio has been getting higher and higher. June 2013 it was at 65%, which is a range for which I’d like to “keep an eye out”. Since then it has gone up to the 70s, all the way up to 97% at one point, and now settled in the mid 80s. That’s just too high for me. The current yield is strong at 4.58%, but their EPS is going to have to increase greatly to keep investors comfortable. And even if they maintain their current dividend, it’ll be hard to increase it at a sufficient rate to keep my interest (their last dividend raise was 2%). There has also been little price growth in this stock for the last few years. Oh and I also didn’t really feel like profiting off a product that is so clearly unhealthy for everyone who uses it. So I sold off my shares at a 3.75% profit (about $40 up including the dividends received).
Trimmed back Omega Healthcare (OHI) and HCP, Inc (HCP): I sold about $500 of each. Real Estate (REIT) stocks are required to have payout ratios of greater than 90%. I wasn’t freaking out about these, but I wanted to scale back my positions and put the extra capital in a slightly less risky stock. HCP was over 100% payout ratio 7 of the last 9 quarters, including last quarter when they hit 229%. OHI was over 100% in 9 of its last 10 quarters. This is largely just the REIT business, which is why I’m not selling off all of my positions (or even 50% of them). Basically, I wanted to stress less about these positions and sent the excess money off to companies with payout ratios of sub 50%. Just a personal choice to have less REIT exposure here. I still hold fairly sizable positions in both, as they have been a high income holding.
The other company I am trimming today is a very difficult one to decide on:
Chevron (CVX) – The fall of oil prices is well documented so I won’t try to explain that here. Oil companies tend to pay huge dividends because they rake in big money….when oil prices are high. When they are low they have to sell off assets, fire employees, shut down operations, and do other extreme things to pay that consistent dividend. Chevron has increased their dividend for 30 straight years, until this year when it only maintained its dividend. And in maintaining its dividend, the payout ratio hit a whopping 175% for the year, which is pretty scary. About a month ago, I sold off my COP stake for the same exact reason, and this week they cut their dividend by 66%. A huge bullet dodged. Chevron is a giant company and it’s very possible they can avoid a huge cut or a cut at all. That’s why I’m selling off about 50% of my position and not the whole thing. If a cut does come, I’ll be happy to buy Chevron again at lower prices after the smoke clears. But for now, I’d feel better cutting back and buying something else. By splitting up my position, I can still profit if Chevron manages to keep the dividend as oil prices rise back up. If it all goes poorly, I will have saved myself some money. Full disclosure: I have no idea what’s going to happen here (same as everyone); I just don’t want to endure the cut (like I unfortunately did with KMI). Good news: I’m selling off my position at +15%.
We all refine our buying criteria as we get more and more experience with investing. We learn from our mistakes and develop methodologies for spotting red flags that could cause issues for our returns (price growth or dividends). As I continue my journey, I expect to have to make less and less sell decisions like this and just continue on the buy side.