In my last article (here) I briefly mentioned that I had sold out of two of my original positions in Ares Capital (ARCC) and Keybank (KEY). One of the main purposes of writing about my portfolio (The Brown Bag Portfolio) is to create a historical record so that over time my readers and I are able to look at the decisions that I've made in its management and determine whether or not those decisions were proper.
Every month I publish an update to the Brown Bag Portfolio. For those of you who may be new readers this is a small portfolio that I've built up over the past two years and is primarily funded by using the money that would have been spent on lunches and other expenses. I'm writing these articles for my own edification (it keeps me honest by publicly reporting on it every month), as well as a learning tool for my own children and other investors that may be new to investing or people with limited means (most of us) who wonder if the small amount they can save each month can really make a difference in the long run.
Can saving only a few hundred dollars a month and putting it to work in the market really have that much of an impact? I believe it can and I write my articles each month in an effort to 'prove' that belief over time. Many people who consider investing think that the market is 'only for the rich' or that they aren't smart enough to handle their own money. I personally believe that's hogwash (where the heck did that term come from?) and that most people are perfectly capable of managing their own money and in fact should do so.
However, for my articles to be of use I must discuss the decisions I make and why, especially when I make a wrong decision, for it's the mistakes that make us better investors if we recognize them and move to correct those mistakes. Now for the most part I'm a 'buy and hold' investor and I've adjusted my strategy to make that easier. For now I only purchase dividend-paying stocks for two main reasons:
1-The compounding effects of dividends: every month or quarter the stocks I've chosen pay me to hold them. By using a DRIP program (Dividend Re-Investment Program) I automatically purchase more of the stock without paying commissions. This is why you'll frequently see fractional shares listed in the tables I publish each month. For example on August 1st, AT&T (T) paid out its regular quarterly dividend of 50 cents per share or $50.99 in my case. This caused an immediate purchase of 1.594 shares of AT&T bringing my current total holding to 103.584 shares that will pay me $51.79 in another three months. This is an example of compounding and the value of DRIP'ing your holdings. Each time the stock pays its dividend, its paying it on slightly more shares than the previous payment and the dividends go up accordingly.
2-The dividends themselves serve as a hedge against panic selling. In theory at least, a stable or growing dividend serves as a check against selling the stock. The current price may be lower than my cost-basis, but I'm making money by holding it. Of course the reality is that I'm not making or losing money until I sell the holding, but regardless of that, the dividend helps keep me from looking at a particular holding and saying to myself that I've got to get out of it immediately.
Even though I'm a 'buy and holder', that doesn't mean that I don't ever sell my holdings. I do and in fact have sold out of two of my original positions in 2018. This article is an attempt to look at those two SELLS and determine if they were the right decisions in retrospect.
Ares Capital Corporation (ARCC)
The first of the sells I made in 2018 was of Ares. At the time of the sale I owned 110.266 shares with a cost-basis of 17.01 per share. At the time of the sale I had a loss of $187.31, but had received dividends of $169.67, so at the time of the sale I really only lost $17.64 out of pocket.
At the time of the sale Ares had spent approximately 9 months below my cost-basis and I had been patiently receiving the dividends and slowly watching my cost-basis reduced. I grew frustrated with the low share price and began to question their ability to continue to pay the dividend. In retrospect this has turned out to be a mistake. Not only has Ares risen above my original cost-basis (at the time of this writing), but they have also raised their dividend.
This mistake has turned out to be a learning opportunity. I didn't immediately panic when Ares share price plummeted into the high 15's, in fact it fell briefly to into the low 15's after my sale, but I allowed my frustration with the stock to make what has turned out to be a mistake. In retrospect I should have done a deeper dive into the company and trusted their management team. In fact this lesson has underscored why I continue to hold Pattern Energy Group (PEGI) and AT&T, both of which are sitting below my cost-basis and have been for some time.
My decision to sell Keybank was in many respects the exact opposite of the scenario I outlined above. I originally started building a position when I bought fifty shares of Keybank in the mid 12's. Around this same time I began to realize how much I was spending on commissions and decided to raise the amount I saved prior to making a purchase. Within four months, however, my original 50 shares had risen to the 18's.
I still liked Keybank, in fact I liked them a lot more after seeing my 'paper-gains.' Foolishly I allowed my excitement about my gains to blind me to the fact that the stock had probably hit a plateau. I purchased another 50 shares in the low 18's and became disappointed as the stock barely moved over the next year. Normally this wouldn't be an issue, Keybank raised its dividend twice during that time and I certainly wasn't losing money, but as time wore on I grew ever more frustrated even as the stock slowly rose into the 22's before quickly dropping back into the 20's.
This was hardly a terrible position to be in. I was still approximately 30% up in the stock and I now had 102.423 shares. The problem was that the yield on the shares was just over 2% and I didn't really have enough to make keeping it worthwhile. Additionally I didn't see anything on the horizon that would drive the stock higher, even when the Federal Reserve raised rates the stock barely moved.
I went back to the quarterly reports and read over the transcript. Was there anything said by management over the past several reports that would indicate that Keybank would restart its upward momentum? No. After reading through the transcripts I came away feeling that Keybank was a good regional bank, but I probably wouldn't see much price appreciation over the next year. If I were earning 4-6% in dividends I would've continued to hold, but at two percent I felt it was much like holding the money at the bank itself.
In the end I sold my position and moved all the money (and a little extra) into purchasing 40 shares of Dominion Energy, which is currently paying a 4.72 yield and has risen more than $5 a share since my purchase.
I violated my rule of not selling twice this year, both for what I thought were good reasons at the time and have had mixed results. Although I was concerned that Ares might cut their dividend, when I go back to look at the quarterly reports there was nothing in them that would indicate that I might be looking at that situation. Instead of selling I should have been content to earn the 9% yield and grow my shares faster due to the lower price.
My sale of Keybank on the other hand was a correct decision. I'm not at the point where I'm trying to preserve wealth with my portfolio, I'm still in an accumulation and growth stage. Although the stock has appreciated somewhat since my sale (up $1 as of the time of this writing), the low yield wasn't enough to convince me to stay the course.
In both of the examples above, frustration became the impetus for the sale. Frustration with a stock isn't in and of itself enough of a reason to justify a sale. In the case of Ares Capital I should have recognized that the 9% yield was in and of itself enough a reason to stay long (as long as the yield remained safe). In that case I should have done more homework and decided to err on the side of the yield. In the case of Keybank I'm pleased with my decision. The 2% yield just wasn't enough to keep me in the stock.
Disclosure: I am/we are long D, PEGI, APLE, EPD, EPR, T, MAIN, OXLC, ECC.
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.