Caught Between A Rock And A Hard Place

by: Robert Allan Schwartz

Summary

I have a non-sleep-well-at-night investment.

I don't want to sell it.

I don't want to hold it.

What could/should I do?

The following is a true story. The names of the companies involved have been changed, because I own four companies that fit the pattern, and this article is about the pattern, not about one specific company. The numbers given are accurate for one of the companies.

Background: I am currently 60. I plan to retire at 62, when I qualify for Social Security. I am an income investor. I am a dividend growth investor [DGI]. My portfolio is on track to achieve this goal, unless something goes seriously wrong with one or more of the four companies I own that fit this pattern.

On January 22, 2015, I bought shares in company XXX for $45.16 each. Over the next 12 months, company XXX paid a total of $2.18 in dividends, for a current yield of 4.827%. As a DGI, I thought anything over 4% was doing pretty well.

Fast forward to yesterday, June 15, 2016, when shares in company XXX closed at $32.92 each. The bad news is that I now have an unrealized capital loss of $12.24/share, or 27.1% of my cost. The good news is that over the next 12 months, company XXX will pay [assuming it continues its history of dividend growth] a total of $2.42 in dividends, for a current yield of 7.351%. This is an example of an "accidental high-yielder".

The really bad news is that I have reason to suspect that the price will continue to decline, and I have reason to suspect that the dividend will be cut. What are my reasons? Two of the four companies are in the oil sector, and most oil sector companies have already cut their share prices, cut their dividends, or both. The other two companies are in the healthcare sector; the U.S. government (Medicare, Medicaid, etc.) wants to pay less for healthcare, and less revenues mean less profits for healthcare providers.

Of course, I could be wrong about either suspicion, or both.

What should I do now? Sell all of my shares, sell some of my shares, hold all of my shares, or buy more shares?

I want to sell all my shares now, in case I am right about future price declines and/or future dividend cuts.

I don't want to sell any of my shares now, because I'm reluctant to realize the loss. [The shares are held in a tax-sheltered account, so the capital loss is not usable.] Even if I did sell and realize the loss, see the next paragraph for why that won't help me.

I don't want to sell any of my shares now, because whatever I buy would have to replace the income I would lose by selling. SA contributor Chowder said it best: "Don't fight for the same ground twice." I don't want to lose income now, and have that postpone my plans to retire. I don't want to buy something now with a very high current yield, to replace the lost income, because anything with a yield that high is most likely very risky. There is no company out there today that [a] yields 7.351% or more and [b] is something I would want to own. [I do not want to own MLPs, BDCs, CEFs, preferreds, companies with below-investment-grade credit rating, etc.]

I don't want to sell any of my shares now, in case I am wrong about future price declines and/or future dividend cuts.

I don't want to hold, because this is not a "sleep well at night" [SWAN] company.

I don't want to buy more shares, in case I am right about future price declines and/or future dividend cuts.

I don't want to sell; I don't want to hold; I don't want to buy.

I feel as if I am caught between a rock and a hard place.

Sharing the Pain

Is anyone else out there in this situation?

Are you willing to share your thoughts about what you have done, are doing, or would do if you find yourself in this situation?

If you've been smart and/or lucky enough to avoid being in this situation, are you willing to share how you avoided it?

Thanks for reading my article, and good luck in your investing!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.