When Should You Sell Your Dividend Paying Stocks?

I read an article on Seeking Alpha a while back on the subject of selling dividend paying stocks when those stocks became overpriced or at market tops.

Now, I don't want to take that article out of context, and I'm not trying to be overly critical or controversial here. In fact, I consider the article to have been both sensible and substantive. The whole premise was the idea of preserving your capital by selling dividend payers that were no longer attractive values based on their share price or after a nice run up.

Still, I was really struck by the analogy that the author used to describe the drawback to holding on to a dividend paying stock as the share price fell. Actually, he got the analogy from Richard Russell who seemed to get it from Robert Rhea.

And what was that analogy? Basically, it equated the decline in a stock's share price to the equivalent of a number of "years of dividend income lost."

So the Seeking Alpha piece included a partial reprint of a table that Richard Russell published in his Dow Theory Letters on November 23, 1960. The table shows a list of companies and their corresponding share prices on two different dates - August 3, 1959 and November 1, 1960, a period of significant decline in the stock market.

As an extreme example, Alcoa was trading at $110.25/share on the first date but had declined to $65.50/share by the second date. According to that table, Alcoa's unrealized capital loss was the equivalent (at the time) of 37.5 years worth of dividends.

A more subdued example was that of GE which declined from $81.38/share to $73/share over the same period, which Russell equated to the equivalent of 4 years worth of dividends lost.

A Flawed Investing Mindset

Don't get me wrong - considering market cap declines in terms of how many years of dividends it would take to recoup those losses is a fascinating comparison. On the surface, it seems to make sense.

But dig a little deeper and you'll see that the analogy is a perfect illustration itself of a flawed investing mindset.

There is a valuable lesson included in Richard Russell's table, just not the one that the author of the Seeking Alpha piece believes it to be.

Just as a buy and hold doesn't work very well with indexes or ETFs (which leads to diversification for diversification's sake and the subsequent ownership of a lot of mediocre and crap companies), the table illustrates that buying and holding cyclical stocks can be even more disastrous.

You see, most people think of investing in terms of net worth rather than income. Most people think they have to amass a huge pile of money and hope it's big enough so that they won't run out of money before they run out of life.

Well, that's actually a savings mindset rather than an investing mindset. It's the idea that wealth is a certain net worth figure.

An investing mindset, on the other hand, recognizes that it's cash flow that pays the bills, and that as long as you have positive cash flow, you will never run out of money.

Or to put it more directly, as long as your investments produce a positive cash flow for you, you will always be wealthy.

What Are You Compounding?

Net worth is a faulty metric. It fluctuates based on the whims, fear, and greed of the crowd. Another name for net worth is liquidation value, the amount you could theoretically raise by cashing out all of your assets and capital.

My own investing focus is that of how best to compound my income, not my net worth. Get the income right and the net worth will take care of itself.

Personally, I don't believe this is such a radical concept, and yet it flies in the face of investing conventional wisdom which is obsessed with net worth.

Of course, investing conventional wisdom is heavily subsidized by the managed money industry (mutual funds, ETFs, financial planners, etc.) where compensation is based on how much money they manage, not how well they manage it.

Thanks but no thanks. I'll forgo conventional wisdom mediocrity and stick with ever-increasing income approach.

My goal here - which is more of a proven formula than a dream - is for my investments to pay me more in dividends each quarter than they did the quarter before.

And I make sure I stack the deck in my favor as much as possible by investing in only the highest quality companies I can identify, reinvesting my dividends, holding for the long term to benefit from the compounding effects of dividend growth, trying to add additional investing funds on a regular basis, and, my favorite, employing Leveraged Investing strategies to lower the cost basis on my holdings and accelerate the investing process.

So When Do You Sell a Dividend Stock?

Personally, I wouldn't sell one of my dividend paying stocks unless something fundamentally changed in how I viewed the company, if I no longer consider it a high quality company.

Barring that, why else would I sell? Why would I care about the liquidation value of a position? If my investments generate an increasing stream of income every three months, why on earth would I ever want to liquidate those investments?

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