Posted by
4Life |
Sunday, March 15, 2009
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commentary
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When I add a stock to my dividend portfolio, it is my intention to hold the stock forever. However, sometimes selling a stock is the right thing to do. In determining when to sell a dividend stock, I have one hard and fast sell rule: When an individual stock held as a dividend investment lowers its dividend, immediately sell it. This rule has served me well. Since I have begun chronicling by investments online, there have been several stocks I sold immediately after a dividend cut. Here is a list of those stocks with my exit price and a recent price:
Symbol |
Date Sold |
Sell
Price |
Recent
Price |
% |
Washington Mutual Inc. (WM) |
12/11/2007 |
$18.11 |
$0.00 |
100% |
Wachovia Corporation (WB) |
4/15/2008 |
$25.89 |
$5.54 |
79% |
iStar Financial Inc. (SFI) |
10/3/2008 |
$2.32 |
$1.09 |
53% |
Bank of America Corporation (BAC) |
10/7/2008 |
$28.50 |
$3.14 |
89% |
SunTrust Banks Inc (STI) |
10/28/2008 |
$36.43 |
$9.36 |
74% |
First Industrial REIT (FR) |
11/4/2008 |
$10.22 |
$2.51 |
75% |
American Capital Ltd (ACAS) |
11/11/2008 |
$6.50 |
$0.59 |
91% |
Pfizer Inc (PFE) |
1/27/2009 |
$15.64 |
$12.73 |
19% |
General Electric Co (GE) |
2/27/2009 |
$8.59 |
$7.06 |
18% |
US Bancorp (USB) |
3/4/2009 |
$12.70 |
$8.82 |
31% |
The "%" column is the percentage decrease between the "Sell Price" and "Recent Price". As you can see, each of the stocks continued to fall after it was sold. That adds substantive evidence that my sell after a dividend cut rule is the correct thing to do. With that said, I have begun to question if there were other indicators that should have led me to an earlier sale. Four of the above stocks have one other thing in common - they froze their dividend before cutting it. The table below shows those stocks and the price on the dividend freeze date (declaration date), along with the three stocks I currently hold with a frozen dividend:
Symbol |
Date Froze |
Freeze
Price |
"Sell
Price" |
% |
Bank of America Corporation (BAC) |
7/23/2008 |
$30.64 |
$28.50 |
7% |
Pfizer Inc (PFE) |
12/15/2008 |
$17.36 |
$15.64 |
10% |
General Electric Co (GE) |
9/25/2008 |
$25.25 |
$8.59 |
66% |
US Bancorp (USB) |
9/16/2008 |
$33.34 |
$12.70 |
62% |
Home Depot Inc (HD) |
11/15/2007 |
$29.07 |
$18.00 |
38% |
M&T Bank Corp (MTB) |
7/23/2008 |
$68.51 |
$31.85 |
54% |
Royal Bank of Canada (RY) |
8/28/2008 |
$45.68 |
$22.99 |
50% |
The "Freeze Price" is the closing price the first trading day after the dividend freeze was announced. The "Sell Price" for the first four (those that I have already sold), is the actual price I sold it for and for the three I still hold it is a recent price. Based on the above, it appears the prudent thing to do would be to sell a stock after it freezes its dividend. Like a dividend cut, an investment with a froze dividend is no longer aligned with my dividend portfolio’s goal of building an ever-increasing source of dividend income.
Care should be taken in considering that not only have the above stocks fell over the last year or so, but virtually every other stock has fell. So what appears to be hard and fast rules in this market, will need to be evaluated under different phases of the cycle. But for now, selling after a dividend cut or a dividend freeze appears to be a prudent rule to follow. However, I do not see the dividend freeze rule as stringent as the dividend cut rule. Each situation needs to be evaluated and sometimes an immediate sale is not warranted. Considering all this, I would phrase my dividend rule as such:
When an individual stock held as a dividend investment freezes its dividend, this is a strong sell indicator. The specific facts and circumstances should be immediately evaluated and continuously monitored until the stock is either sold or it increases its dividend.
If it is decided not to sell the stock, the pressure to sell should increase as time passes. Another strong indicator to sell would be if the dividend freeze persists long enough to incur a flat dividend year-over-year. Dividend freezes need to be monitored closely. In many instances they are the first step to a dividend cut.
Full Disclosure: Long HD, MTB, RY
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Posted by
4Life |
Tuesday, November 04, 2008
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commentary
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With all the talk about the financial crisis, market melt-downs, Dow/S&P crashing, et. al., the one metric that really matters to each of us individually is the performance of our personal portfolio. So, how is your portfolio doing this year? Mine has performed above expectations.
Investing Goals
Year to date through October, I am up 67%, with no single negative month so far in 2008. I am at 137% of my 2008 goal and expect to go higher. Before you brand me a liar, heretic or worse, let me explain. The above statements are relative to the goals I set for my portfolio, which is not total shareholder return or a specific portfolio size. My goals were defined in this December 1, 2007 Investing Goals post.
My investing goals center around dividend income and yield on cost. If the first step in successfully managing something is to set a goal, then the logical second step is to determine how to measure your progress to ensure you are moving toward your goal.
Align Your Goals With The Desired Results
If you are a long-term buy and hold income investor, does the absolute size of your portfolio matter? Put another way, if you need to generate $100,000 of income each year to live on, does it really matter if that income is generated from a $900,000 or $1,100,000 portfolio?
Many people make the mistake of setting the wrong goal, such as 'I want to be a millionaire' or I want a portfolio of certain size. Okay, once you have a million dollars or a large portfolio, what are you going to do with it? Will it be enough for you to live on? How do you plan to make it work for you?
Resiliency In The Face of Adversity
Like most investors, my portfolio's 2008 return is negative. However, it has performed significantly better than the S&P. Relative to its goal of increasing dividend income, my portfolio has faced adversity during the year:
Three stocks cut their dividend, resulting in an immediate sale:
- Bank of America (BAC)
- iStar Financial Inc. (SFI)
- SunTrust Banks, Inc. (STI)
In addition, three stocks have been put "On The Shelf" after not increasing their dividend:
- General Electric Co. (GE)
- The Home Depot, Inc (HD)
- RBC Royal Bank (RY)
There will likely be other problem stocks before the financial crisis is over. However, one of the true advantages of income investing over capital appreciation is it can be successful in any type of market conditions.
Disclosure: Long GE, HD and RY
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Posted by
4Life |
Tuesday, October 14, 2008
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commentary
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I am not a stock trader; I am a dividend and value based long-term buy-and-hold investor. When I add a stock to my dividend portfolio, it is my intention to hold the stock forever. I am not smart enough to time the daily gyrations of the stock market. When stock prices start dropping, our primal instinct of flight kicks in and we want to sell. In many cases that is the time to be buying. However, sometimes selling a stock is the right thing to do.
In determining when to sell a dividend stock, I have one hard and fast rule: When an individual stock held as a dividend investment lowers its dividend, immediately sell it. This may seem like a stringent rule and I have taken a lot of criticism for it from both directions.
Some have said waiting until a stock drops its dividend is too late. There were rumors and innuendos that Bank of America (BAC) was going to drop their dividend some time before it was announced. As it turns out, the rumors were correct this time. However, I can't (and won't) base investment decisions on innuendo or rumor.
Others have said that selling a stock after it cuts its dividend is too early. Their argument is the bad news has already been priced into the stock and you are selling into weakness. I feel strongly that an immediate sell is the correct thing to do for the following reasons:
I. Cockroach Theory
When a company that has a long history of raising dividends and suddenly stops, it is usually more than a simple bump in the road. For the one cockroach you have seen (lower dividend) there are probably hundreds waiting to reveal themselves.
II. Adultery Theory
I view a dividend cut as financial infidelity by the company. After a company has raised its dividend 10, 20, 30 or more years that first dividend cut is very hard. Like someone who first has a series of affairs after 30 years of marriage, the first one is guilt ridden, but it is much easier the second time around. Eventually, the guilt goes away. Do you think Citigroup (C) would have the same difficulty cutting its dividend again? In the case of C, I sold part of my position when it became evident that their capital structure could not sustain the company going forward without a substantial cash infusion.
III Experience
My experience has been once a company cuts its dividend, the stock continues down. That has been the case with these that I sold after a dividend cut (prices as of 10/13/08):
- Washington Mutual Inc. (WM) - Sold at $18.11 on 12/11/2007, now worthless
- Wachovia Corporation (WB) - Sold at $25.89 on 4/15/2008, now $5.85
- iStar Financial Inc. (SFI) - Sold at $2.32 on 10/3/2008, now $1.46
- Bank of America Corporation (BAC) - Sold at $28.51 on 10/7/2008, now $22.79
Sure BAC will likely come back over time, but WM and WB will never come back. Even assuming BAC will come back at some point in the future, I likely would have been better to sell, wait for the 30-day wash sale window to clear and buy it back (see IV below on why this is not an option for me.)
IV Portfolio Goals
The most important reason for selling a dividend stock after it cuts its dividend is that the investment is no longer aligned with my dividend portfolio's goal of building an ever-increasing source of dividend income. Some have argued that certain securities are good value plays after a dividend cut. This may or may not be true, but my dividend portfolio's primary objective is dividend income, not capital gains. I have a separate portfolio for that. To date, I have not transferred any dividend stocks to my capital appreciation portfolio.
Finally, some will say that it was the "right" thing to do for the company to cut the dividend given the circumstances. In many cases I do not disagree. However, in the cases I have been involved with the company was not "given" the circumstances, they created them through their own actions. If a company was truly a victim of circumstances which couldn't possibly be foreseen or planned for, I would gladly to cut them some slack and consider an exception to my rule. This situation rarely ever comes along.
Disclosure: No position in any of the aforementioned securities.
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Posted by
4Life |
Thursday, August 21, 2008
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commentary
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Earlier this week we looked at my top 5 high fliers for 2008. Unfortunately, for every up, there is a down and that is certainly true for my portfolio. As before, we will look at results through July 31, 2008. Here they are my cellar dwellers with comments:
#5 - General Electric (GE) -19.3% Total 2008 Return
Of my cellar dwellers, GE is the one I am most bullish on. I liked it at $38 when I bought my first tranche in July/2007, and liked it even more at $29 when I bought my last tranche this month.
#4 - First Industrial Realty, Inc. (FR) -22.3% Total 2008 Return
This was my first ever dividend investment. It was purchased in December/2003. FR has consistently raised it's dividend since then; and unfortunately, its share price has consistently fell since then. FR has more lives than a cat - each time I give it up for dead, FR raises its dividend.
#3 - SunTrust Banks, Inc. (STI) -31.8% Total 2008 Return
Until recently, STI wore the cellar dweller crown. It very well could be the next bank divested, if it cuts its dividend.
#2 - American Capital Strategies, Ltd. (ACAS) -31.9% Total 2008 Return
ACAS has long been one of my favorite stocks. I have been in and out of it since February/2004 and still have a positive 2.2% life-to-date annualized return. ACAS continues to raise its dividend, but at some point it operating results will have to turn around.
#1 - iStar Financial Inc. (SFI) -63.8% Total 2008 Return
SFI is on a breathing machine and short of an immaculate recovery it likely will not make it to the end of the year. It's 14.6% yield on cost will be missed, while its double-digit share price collapse will not.
I take solace that even with these poor performers, I am still ahead of the S&P 500 for the year. In dividend investing, you can't focus too much on the good or bad. You learn from each and keep your eye on the long-term.
Disclosure: Long in GE, FR, STI, ACAS and SFI.
(Photo: Steve Woods)
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Posted by
4Life |
Friday, August 08, 2008
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carnival
|
Each Friday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it's where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al.
Below are the carnivals that I participated in this week, along with a link to my article:
Articles I enjoyed reading included (in no particular order):
The DIV-Net Featured Articles
Articles From DIV-Net Members
The Wealth, Money & Life Network Featured Articles
Other Articles
There are some really good articles there, please take time and read a few of them.
(Photo: Sachin Ghodke)
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Posted by
4Life |
Saturday, July 26, 2008
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commentary
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Like most financial company's, iStar Financial Inc. (SFI) has experienced a difficult time over the last several quarters. It has seen it share price collapse from a 52 week high of $40.55 to under $10. SFI's quarterly dividend is $0.87/share. Unfortunately, SFI has not earned its dividend the last four quarters, and it doesn't appear it will in Q2. In a July 18, 2008 earnings revision, SFI said it expects a second quarter non-GAAP loss of $1.55 to $1.45 per share with loan loss provisions of $275.0 million.
Ironically, SFI's cash has been growing over the last four quarters - from $88 million at Q2/2007 to $119 million at Q1/2008. Looking at the cash flow statement, this increase in cash has been funded via a net issuance of long-term debt. SFI's net issuance in 2007 was about $4.5 billion and in the first quarter this year it issued (net) a little over $100 million.
From an allocation standpoint, I was scheduled to purchase SFI in August. When I saw the 40+% dividend yield, a red flag went up and I began looking deeper into the company's financials. I have a small portion of my portfolio set aside for speculative stocks and SFI is by far my riskiest stock in that category.
As mentioned in my "On The Shelf" post, if a security is not performing at the desired level for additional purchases, but also is not performing badly enough to warrant a sale, then I will put it "on the shelf". By that I mean it will be set aside within my income portfolio with no additional purchases made until its outlook improves or deteriorates to the point it should be sold. SFI currently fits that description. As such I have put SFI on the shelf, until its financial condition changes for the good or bad.
Disclosure: Long in SFI
(Photo: Gabriel Doyle)
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Posted by
4Life |
Wednesday, November 14, 2007
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analysis
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Linked here is a PDF copy of my detailed analysis of iStar Financial Inc. (SFI). Last week I added to my position in this stock. Below are some highlights from the above linked analysis:
Company Description: iStar Financial, Inc. operates as a finance company focused on the commercial real estate industry. The company, which is taxed as a real estate investment trust (REIT), provides financing to private and corporate owners of real estate.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. SFI hits a home run here. It is trading at a discount to all four valuations listed above. If I exclude the high and low valuation, and average the remaining two valuations, SFI is trading at a 21.2% discount. SFI gets a Star for being fair valued.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. SFI earned Stars in 3.) and 4.) above.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. SFI earned Stars for 1.) and 2.) above.
Other: SFI, which focuses on commercial real estate industry, may have been unfairly pulled down in the sub-prime meltdown. Its 11.78% yield combined with a solid history of raising dividends makes this stock worth a second look. It is important to note that that the abnormally high payout ratio is due to the company's status as a REIT, which requires it to pay out 90% of its earnings each year.
Conclusion: SFI earned one Star in the Fair Value section, two Stars in the Dividend Analytical Data section and two Stars in the Dividend Income vs. MMA section for a total of Five Stars which rates it as a 5-Star Strong Buy.
Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I own shares of SFI.
What are your thoughts on SFI?
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