Ignoring 52-Week Highs, Reinvesting Dividends And Other Lessons Learned

Includes: KO, MMM, PG
by: Mike Nadel

Back on Sept. 7, I sold 200 shares of 3M (NYSE:MMM), which had been my largest holding. Since then, the price has increased by almost $10 per share, hitting its all-time high during Friday's (February 8, 2013) intraday trading. That means I left nearly $2,000 on the table.

Was my sale foolish? More on that in a minute. First, a little backstory.

With some money burning a hole in my pocket from a real-estate transaction, I bought 333 shares of 3M in June 2008. I paid $74.95 per share, spending just under $25K for my stake. I was still more than three years away from having heard of the Dividend Growth Investing strategy I now employ and I did zero research before making the purchase. So getting such a strong company was basically dumb luck.

Of course, I soon was feeling a lot more dumb than lucky. Along with the rest of the stock market, 3M was in freefall mode. By September 2008, it was trading at $65. On Jan. 15, 2009 -- the day I was laid off from my job -- MMM hit $55. And on March 2, 2009, 3M plummeted to its multi-year low of $40.87 before beginning a slow, steady climb back.

In those days, I wasn't a very patient investor -- nor a very smart one. I often relied upon recommendations from friends or pundits, and I sometimes simply bought whatever the rest of the crowd was buying. In fact, I bought 3M after reading a few paragraphs about it in a financial magazine. Thankfully, as the price fell, I did something uncharacteristically smart and patient: I didn't bail at the bottom.

Although I did not spend "new money" on MMM when its price declined, I actually did buy more shares. Through my brokerage firm, I reinvested dividends, getting 3.0267 shares at $55.40 in December 2008, and 4.1623 shares at $41.46 in March 2009, and 3 shares at $57.70 in June 2009, and so on.

By this past September, I had accumulated 40 extra shares of 3M over four years -- many at bargain prices -- simply because I had chosen to automatically reinvest dividends. I still like the multinational conglomerate's fundamentals and its fantastic product line. I mean, who doesn't love Post-it notes, Scotch tape, O-Cel-O sponges and Thinsulate (among the tens of thousands of things 3M sells)? And naturally, I appreciate its 54-year history of growing dividends.

Nevertheless, I wanted to trim my stake to bring it more in line with my other holdings. At 2.5%, MMM also is the lowest dividend-yielder of my 26 positions, and I decided I'd rather allocate more of my resources to companies yielding at least 3%. Those are the reasons I sold those 200 shares at $93.59 apiece, not because I was nervous that 3M's price was approaching a 52-week high.

Sure, had I waited until Friday morning -- when the price reached $103.32 -- I'd have that extra 2 grand. Were I a soothsayer, however, I'd be living large at The Mirage Sportsbook in Vegas. While we need to learn from our personal experiences, we also need to move on. I have no regrets about my 3M sale, and I try not to second-guess myself for taking profits. Besides, I still have a stake in the company, and the value of my remaining shares has climbed nicely.

So what are the morals of this story?

1. There are many reasons to sell a stock -- or to choose not to buy one in the first place -- but the mere fact that it is at or near its 52-week high is not an especially good one. Well-run companies that consistently grow earnings will establish new highs over and over and over again. Sometimes, a company can be at its 52-week high but still be at fair value or even be undervalued.

2. Most good companies don't cut their dividends during lean times and most great companies actually keep increasing divvies even during troubled times, such as the 2008-09 recession. While the past guarantees nothing in the future, I feel pretty confident owning corporations that have been growing dividends for half a century. Aside from 3M, I also own Coca-Cola (NYSE:KO) and Procter & Gamble (NYSE:PG) from that elite group. Such companies are core holdings in many a DGI portfolio.

3. One reason so many individual investors fail is they buy when the market is overheated and sell after it already has plummeted. Buy-high-sell-low is a recipe for severe portfolio pain, as I know all too well from my undisciplined past.

4. By reinvesting dividends, more shares are accumulated when prices decline. Obviously, those who rely upon dividends to pay living expenses take them in cash; so do folks who like to receive dividends from one company and then invest in others. I reinvest divvies for most of my holdings because I like to benefit from the magic of compounding.

5. Being a more informed, more patient investor with an actual plan has helped my net worth. So has being a little lucky. When I make a good shot on the golf course, I've been known to proclaim: "Luck is better than skill!" Sometimes I think the same is true in investing.

Disclosure: I am long MMM, PG, KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.