Many of us have an elaborate plan for how to select the stocks we’re going to buy. We have financial numbers we want to see. These could be value indicators such as P/E (price to earnings) or P/B (price to book).
You could also look for the perfect combination of payout ratio, dividend yield, and history of dividend increases. Or, you might be more macro-oriented and look for patterns in the bigger economic picture. Each person’s strategy will be slightly different. And no matter how hard we try to avoid it, our individual biases will play a part as well.
We can’t deny that we have a strategy and aren’t just buying stocks all willy-nilly.
But what about selling? Do you have a strategy for that?
I’ll admit that selling is the hardest part for me. I lived in an RV a few years ago. My 200-some square feet of space made me think about everything I owned. I could get rid of those physical things. But I still love to hoard my stocks. Once I have a great yield in place, why would I want to let it go?
It’s easy to let your emotions come into play. You can tell yourself “I’ll sell when the stock goes up a little more.” Then just a little bit more. It becomes a vicious cycle, and you never end up selling. Even worse… things could go sideways, and you miss selling when you had the chance.
When we only focus on the buy side, we only have half a strategy. So, it’s important to have some idea of what you’re looking for to trigger a sell.
Stocks You Buy Must One Day Be Sold
Whether you cash in your shares for a splurge purchase or your grandchildren unlock their inheritance, shares will eventually be turned back into cold hard cash. It’s inevitable.
Last year, we sold six Yield Shark positions for gains ranging from 4.2% to 49.3%. Take a look:
- ASE Technology Holding (ASX): 29.6%
- ZIM Integrated Shipping Services (ZIM): 34.1%
- Travel Centers of America 8% Senior Notes (TANNL): 4.2%
- Necessity Retail REIT (RTL): 4.9%
- Eagle Bulk Shipping (EGLE): 49.3%
- Spok Holdings (SPOK): 15.5%
It was a great year for us as we didn’t lock in any losses in 2023. This year is already a little different as we’ve taken one loss along with four gains. I will focus on last year for a reason: each sell was done for a different reason.
ASX and ZIM were speculative plays. We only held them for a few months and were happy to exit with big gains.
We didn’t have a choice with TANNL as the company was bought and our notes redeemed.
RTL got caught in some shady management dealings so we sold and walked away while we could. EGLE was a no brainer. It cut its dividend, so we sold, pocketed a huge profit, and said, “See ya!”
SPOK is the one where I used my intentional selling strategy. The stock saw a big jump in share price, and we decided to sell.
Don’t get me wrong, all the reasons above to sell were valid. Shaky dividend payments and questionable management teams are clear red flags.
But how do you know when to sell if a company is doing well?
Confidently Sell Stocks with an Intentional Strategy
The way we buy stocks is intentional. We have two sections of the portfolio and two distinct goals for the stocks in each. We use our Bedrock Income stocks to reinvest the dividends and build longer-term wealth. Our Current Yield stocks are there to generate a stream of income right now.
Each strategy is rooted on earning dividend income, referred to as yield. When I recommend a stock, I give a buy-up-to price. I calculate this price based on the minimum yield I think we should collect depending on the level of risk of that position. When we talk about dividend stocks, it’s all about the yield.
When we buy a stock, we are saying that we’re happy to receive X% yield per year from the company.
For SPOK, we locked in a yield of 8.9%. After owning it for just 96 days, the share price popped for no apparent reason. At the time, we were up 27% including dividends. That was equal to three years of dividend income in just 96 days. We had the opportunity to speed up the income stream, and we took it.
We had the same opportunity with Travel + Leisure Co. (TNL) earlier this year. We grabbed a 21% gain in just 85 days. That was equal to four years of dividend payments.
Most of us accept that time is money. So why not harvest tomorrow’s income today, lock in the gains, and redeploy the money into your next great idea? Thinking about my income stocks this way helps me prune my holdings to a more manageable number. So, if you’re someone who is always thinking about yield, maybe this selling technique will help you, too.
For more income, now and in the future,
Kelly Green
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