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If you have been following a dividend-generating strategy in your portfolio, there may be a time when you wonder if you should sell any of your stocks, perhaps to lock in capital gains on any shares that have increased in value since your purchase.

Living off your dividends is an enviable position to be in. And capital appreciation on top of that income stream is icing on the cake. So the question is, do you stay the course, hold onto what you have, and just continue to reap the dividends? Or do you sell to capture the capital gains? And if you sell, then what do you do? Do you wait for a pull-back to re-buy the same company, or do you buy shares in a different company?

My personal threshold for good dividend-paying companies is 3%. I have a list of stocks that I am interested in, and I keep their yields updated. When their stock price drops low enough that their yield hits 3%, then I buy. Other criteria that help these companies get on my list are a strong history of paying and raising dividends, and a payout ratio in the range of 50 to 60%, to help ensure the dividend's sustainability.

Keeping such a list prepares me for when I want to sell a stock in my portfolio. I don't have to agonize about what to do next, I simply choose the best company on my list to replace the one I am selling.

I would sell the stocks in my portfolio for three reasons

  1. When a company cuts its dividend. This is an automatic sell, no further questions asked.
  2. When a company fails to raise its dividend as expected. This is not an automatic sell, but I will strongly consider it. Barring any unusual mitigating circumstances, this is probably a sell.
  3. If the price appreciation of the stock far outstrips the growth of the dividend. For example, say you bought a $30 stock that was paying a 3% dividend. Now the stock has appreciated to $60, but it is still paying the same dividend. The yield has dropped to only 1.5%. In this case, I would sell the stock, lock in the capital gains, and reinvest the proceeds into a new stock on my "potential" list that is paying 3%. In this way I am maintaining my dividend stream as well as increasing my total assets.

My current list of dividend stocks includes Diebold (DBD), Johnson & Johnson (JNJ), and 3M (MMM). I know 3M's dividend is on the low side right now, but I will buy more if the price dips, and you can't argue with its dividend history.

Source: When To Sell Your Dividend Stocks