More than any other issue that active portfolio managers face is, when to sell a stock. Most individual investors would agree that selling is often more difficult than buying, especially when the stock has risen handsomely from the original purchase price.
I will say right up-front that selling a solid blue chip, mega cap, dividend-paying champion makes far less sense than selling a growth-oriented stock that has gone way up. The main issue is that there will be a loss of income while the cash that is received for the sale of a stock sits and waits to be redeployed into another dividend-paying stock.
That being said, while I only tend to sell stocks to rebalance or trim for appropriate allocation levels, there are investors who like to book gains and rotate into other stocks that might offer an opportunity for even more income, as well as capital appreciation.
My K.I.S.S. Approach To Selling Shares
- The stock has underperformed and has had a fundamental change in its business model that makes it less appealing for the long term. For example, Apple (NASDAQ:AAPL) decides to stop making smart devices.
- If the share price has risen to the point that its allocation level exceeds your personal investment strategy, sell some shares.
- If the company stops paying dividends (I can live with a stock not raising a dividend for a year or so), dump the stock.
- Here is the real test; if the shares of a stock have gone up nicely and you can live with a dip in income for a period of time, taking a profit by selling a percentage of shares is NEVER wrong, and can build wealth, as well as expand a core portfolio over the long term. This is especially helpful to those with a much longer time horizon.
Using Our BTDP, This Easy Approach Might Help Folks Who Like Taking Profits
The BTDP consists of the following stocks: AT&T (NYSE:T), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), General Electric (NYSE:GE), McDonald's (NYSE:MCD), Chevron (NYSE:CVX), Apple (AAPL), Altria (NYSE:MO), Ford (NYSE:F), Microsoft (NASDAQ:MSFT), Wal-Mart (NYSE:WMT), Pfizer (NYSE:PFE), and United States Steel Corp. (NYSE:X).
Here is a chart in which I have the original purchase price and a suggested price target to sell a certain percentage:
|Symbol||Price Paid||Tgt Price||% To Sell|
Do not misunderstand this simple chart. If you decide to be a seller to take profits, the target price I have noted is to be used simply as a guideline, and I suggest that if the target price is reached, a sale of just 25% of the position will still give you income, while freeing up cash for opportunities later (or a correction, etc.).
I doubt highly whether all of them will reach those prices at the same time, if ever at all, so it should be a slow rotation. The 50% increase from the purchase price and the 25% sale of a position will give you plenty of flexibility.
- You will book profits and have cash reserves.
- You will still hold a significant position in each stock.
- You will have the time to put the cash back to work in other positions, either already owned, or new opportunities.
You might even think that these stocks will never reach those lofty prices. Well, consider that in another portfolio I wrote about in the past, both Johnson & Johnson and Exxon were purchased in the mid $60s-$70s roughly, and are now about $100.00 each. It might take time, but the historical trend of all blue chips is UP. Don't be too surprised when your sell light flashes.
The downside is obvious: less income for as long as the money is not working for you. For those already retired, selling remains an action only to be taken when either the wheels of a company fall off (stops dividends, for example), or rebalancing, done several times per year.
The Bottom Line
The younger you are, the more rotation you can handle, because you still have a long enough time frame to build back a position. If you need the income that the portfolio throws off, I would think twice before taking this action and find other ways to build some cash, like selling a few timely covered calls.
Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.
Disclosure: I am long AAPL, CVX, F, GE, JNJ, KO, MCD, MO, MSFT, T, XOM. 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.