As a dividend growth investor my modus operandi typically revolves around buying shares of high quality companies that I deem undervalued. Those companies typically have long histories of growing the dividend payment to shareholders which is what dividend growth investing is all about. By running this blog that chronicles my investments and my journey to financial independence I always want to be open and honest with any changes to my portfolio. After all, if I'm not willing to follow my own advice why should you follow my story?
Occasionally though it comes time to sell some shares and close a position. Sometimes that decision is due to valuation and other times it's due to concerns about the company.
You don't see too many sales within my portfolio and just glancing at the post labels you'll see it heavily skewed towards purchases. There's over 130 Recent Buy articles, but this is only the 9th Recent Sell article. So yeah I much prefer to make purchases, but sometimes the market or the company compels me to sell.
Transactions & Returns
Last Friday, September 2nd I made the decision to close my 81.149 share position in HCP, Inc. (NYSE:HCP) for $39.09 per share. I first purchased shares of HCP in October 2013 and doubled my position with an additional purchase in December 2013. In that time I reinvested one dividend payment that added 1.149 shares.
The following table shows the investment transactions/cash flows and various return calculations.
|HCP, Inc. Cash Flows and Investment Returns|
As you can see this wasn't my finest showing as far as returns go, but I did turn a profit so I can't complain. Capital appreciation provided a 1.09% return and cash dividends did the heavy lifting with a 15.96% return. That gives a total return of 17.06% in nearly 3 years.
I prefer to look at my returns on an internal rate of return basis because that takes the timing of everything transaction into account and timing is everything. When we look at the internal rate of return for the cash flows of my HCP investment the annualized return comes to 6.22%. That's definitely nothing impressive, but I'm pretty happy with over a 6% annualized return considering the share price essentially went nowhere.
Reason for the Sale
HCP is a health care real estate investment trust which I'm very bullish on the combination of those two. So why sell if I'm bullish?
Well, it really comes down to the upcoming spin-off of the skilled nursing unit. The skilled nursing unit, primarily HCR Manorcare has faced all sorts of issues over the last several years and has frankly been a thorn in the side of management.
Demand for skilled nursing has dropped leading to declining rents and there's not much end in sight as many of those facilities rely on government payments and you can't really argue with what the government says they'll pay. Not only that but HCR Manorcare even knowingly tried overcharging Medicare/Medicaid.
So yeah, there's trouble ahead. It's important to remember though that HCP isn't on the hook for the actual issues revolving around HCR Manorcare, rather they're just bystanders that are having to deal with the fallout.
Management has decided to spin-off the skilled nursing part of their real estate portfolio into a new REIT called Quality Care Properties (NYSE:QCP) and I want no part of this new company. So the decision was sell before the spin-off or wait until the spin-off and sell the QCP shares.
On top of that management hasn't been too clear with the dividend policy after the spin-off which leads me to believe that there's likely to be a dividend reduction. Now, I believe that the dividend should be reduced if you're splitting the company up, but since I don't want to own QCP why deal with the reduction?
I wouldn't be opposed to re-purchasing shares of the parent company HCP though once the spin-off is complete.
Effects on my Dividend Stream
Unfortunately any time you sell a position that means you no longer get to receive dividends from the company. HCP pays a hefty dividend with a current yield of 5.8%. As such HCP provided over $186 in annual dividends and was the 10th highest dividend payer in my portfolio so losing those dividends stings a bit.
My FI Portfolio's forward 12-month dividends decreased to $5,464.91. My Loyal3 Portfolio's dividends are still at $65.06 which brings my total taxable account forward dividends to $5,529.96.
What to do with the proceeds?
Proceeds from this sale came to $3,164 and adding that to my current cash balance of ~$3,400 leaves me with around $7,500 to work with. Unfortunately I'm not seeing a lot of value in the markets at this time so I'm not likely to invest this capital anytime soon.
So my plan, as of now, is likely to use this capital to be a bit more aggressive with options. Ideally I'd find some dividend growth companies that are attractively enough priced that I can sell put options to generate extra income until the shares are "put" to me and then turn around and sell calls until they're "called" away. This will allow me to generate a return via option premium until more attractive values present themselves.
Do you own HCP, Inc.? Are you planning on holding both companies after the spinoff or selling your HCP shares like I did?
Please share your thoughts below.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I no longer have a position in the company. I am not a financial professional. Please consult an investment advisor and do your own due diligence prior to investing. Investing involves risks. All thoughts/ideas presented in this article are the opinions of the author and should not be taken as investment advice. Information from this article was sourced from HCP, Inc.'s SEC filings. All chart/images presented in this article were created by the author unless otherwise noted.