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Merck (NYSE:MRK) has been on a tear lately, going from $38 in the first week of June to $44.24 as of this writing. That's a 16% jump on top of the run up the stock has seen along with the rest of the market since the lows of October 2011. In this article, we provide a few reasons why we sold MRK during this latest run up.

Falling Yield: Merck has almost always been a higher yielder than close competitors like Pfizer (NYSE:PFE) and Bristol-Myers (NYSE:BMY). That made it one of the biggest reasons to own it over its competitors. But the recent run up has brought Merck's current yield well below 4%, almost on par with the other names mentioned above. The graph below shows the yield over the past 5 years and the obvious effect of increasing price per share on the yield. And it has been established already that Merck is not really the place to be for dividend growth either, where Abbott (NYSE:ABT) takes the cake.

(click to enlarge)(Source: Ycharts.com)

Overbought: While one could argue the entire market seems to be overbought, the pharmaceuticals have definitely been enjoying a smooth ride up because of the search for yield and safety. The price vs RSI chart below shows Merck has been overbought for the most part recently. A pullback is highly likely in such circumstances.

(click to enlarge)

Singulair: Singulair has been Merck's best drug easily. Even in the latest first-quarter results, Singulair proved to be the cash cow. With the patent on Singulair expring in August, competition from generics will get tougher. When you have your number 1 product challenged, your numbers are bound to take a hit (unless you are Apple and your competition sucks.)

A Personal Reason: We established a position in Merck in the early 30s, which gave us a yield of about 5.5% and an unexpected capital gain of close to 40%. Even considering the present 4% yield, it made sense to realize the 40% gain on a stock that is not considered a real swift mover. Even if one does not want to sell the entire position, it would be prudent to at least stop DRIP-ing till there is a reasonable pullback.

Conclusion: None of these reasons by themselves might be enough to prompt a sell decision on a proven dividend stock like Merck. But when you are sitting on a 40% gain on a stock with falling yield (and almost no dividend growth) and the company is about to face competition on its most popular drug, it is hard to resist pocketing your profits.

Source: Merck Is Getting Overheated