Replace A Loser With A Dividend Growth Blue Chip

Includes: IBM, TECK, UNP
by: Canadian Dividend Growth Investor

In my last article, I talked about why I'm building some cash for my portfolio. Other than savings from my day job's paycheck, another way to build cash is by selling a loser. It's never easy to sell a position at a loss, but I have to decide what's better for my portfolio.

Indeed, I did make the mistake of buying a miner when it wasn't priced attractively. And I intended to correct that mistake by buying a higher quality alternative as I outlined in this article. Another way to correct the mistake of buying a miner is to replace it with a better alternative.

The best way is to sell out the loser position at an opportune time, such as when the stock goes up several percentages in a day. It's not unheard of for Teck Resources (TCK) for this to happen. However, for that to happen, and to replace it immediately with a better alternative which is priced attractively becomes more difficult. Nonetheless, today, I did sellout on my loser position of Teck. Miners generally have volatile earnings. If I had known better, I would have bought it at the lows instead of buying shares just for the sake of holding something and receiving dividends. In fact, miners generally aren't a good dividend play. Teck's earnings are quite volatile after all! To make matters worse, I bought the loser in my tax-free account. As a result, I cannot report a capital loss. This investment mistake cost me a loss of 30%.

After selling out of Teck Resource, I used some of the capital to buy Union Pacific (UNP), and the rest to buy International Business Machines (NYSE:IBM). Both Union Pacific and IBM have more stable earnings and dividend growth than Teck. In addition, today UNP and IBM both dropped in price today, and are more attractively valued.

Comparison between TCK, IBM, and UNP

Ticker S&P Rating Price1 Yield DGR 5Yr Analyst Estimated Earnings Growth (%)2 Morningstar Fair Value Estimate ($)
TCK BBB $27.33 3.23% 27% - $24
IBM AA- $174.83 2.17% 15% 10.2% $208
UNP A- $151.16 2.09% 26% 15% $168

1 - closing price of Oct. 17, 2013

2 - estimations from FAST graphs

TCK 8 Year Graph

(Click to enlarge)

One can easily see how volatile Teck Resources' earnings are, especially compared to IBM and UNP's graphs below. The high dividend growth for Teck Resource from the table above is misleading because it's actually recovering its dividend from the cut in 2009. Even with its higher yield, I would still switch Teck with a higher quality blue chip company instead. It's not worth the roller coaster thrill ride.

IBM 15-Year Graph

(Click to enlarge)

IBM is shown to be undervalued by both Morningstar and FAST Graph. IBM's revenue disappointment this week brought the shares down to even more attractive levels, and a higher yield to start.

UNP 15-Year Graph

(Click to enlarge)

With the pullback in today's price, I'd say UNP is at fair value, and not a bad place to buy some shares if it fits for your portfolio allocation purposes. Union Pacific is my first railroad holding, so it helps in diversifying my portfolio.

In Conclusion

It's important to recognize a mistake and learn from it, than to keep it in the drawer. I rather replace a company with volatile and unpredictable earnings with ones which are more stable. Replacing Teck with IBM and UNP is just an example. The idea is to hold high quality companies with stable earnings (and earnings growth), and growing dividends. So, that in the long term, I receive a stable, growing income stream and steady price appreciation.

(The fact that this capital is in my tax-free account also plays a role in my choosing lower yield and higher growth companies.)

Disclosure: I am long IBM, UNP. 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.