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Dividend Stock, it's good if it's up, but what if it goes down?

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MartijnS

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Background: In putting together a projected plan on how to grow my excess business cash, I started looking for and investing in some reputable stocks to generate dividend (better than 0.1% interest in the bank), as well as some more "roulette" style stocks.

Now one of the (many) things that stuck from MJs book was a general approach (I know, not a rule, just a suggestion) for when buying dividend stock, that if the stock rises the equivalent of 3 years worth of project dividend, just sell and lock that in right away. Smart call, makes sense. That's a rule of thumb I'm implementing (didn't hit that 3 yr mark yet on any).

Question: However since stock go both up and definitely down, what do you do if it goes down? When do you stop the bleeding? If it went down the equivalent of say 1 years worth of dividend, and you didn't even get 1 quarters worth of dividends, do you just wait? Let it slip?

Wondering how other people deal with this? Any rules of thumb? What has or hasn't worked for you?
 
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Late Bloomer

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Question: However since stock go both up and definitely down, what do you do if it goes down? When do you stop the bleeding? If it went down the equivalent of say 1 years worth of dividend, and you didn't even get 1 quarters worth of dividends, do you just wait? Let it slip?

Wondering how other people deal with this? Any rules of thumb? What has or hasn't worked for you?

I'm currently rebuilding after a financial collapse, so I'm out of the market right now. But I am carefully considering what principles I'll want to use as soon as I can get back in. The "trailing stop" idea appeals to me a lot.

The idea is that you pick a percentage that you'd be willing to endure a stock dropping, while you still hope it might go back up. You put in an order that is always good til canceled, to automatically sell the stock if it drops by that much. The system will get you out of an investment that goes down, no matter how you happen to feel at the time.

If the price goes up, you move up the threshold that will trigger the automatic sale. You don't move the threshold back down. If it's triggered then you have captured profits to take them off the table near the peak.

Example, you buy at $100 and you are willing to temporarily lose 10% on this stock before you go up. Put in a good til canceled sell order at $90. If the stock ever drops to $90 or below you're out. Unless the market is too clogged to execute promptly, you limit your potential loss on this stock to 10%. The stock goes up to $200. Change the good til canceled sell order to sell at $180 (10% less than the new price of $200). If it ever drops below $180 you are out, no matter how you happen to feel at the time.

For diversification, the person I learned this idea from (Moe Ansari, who has an investing podcast that promotes his financial management company), puts his clients only in mutual funds rather than individual stocks. He uses funds with consistent performance and low volatility. To choose the funds, he does asset allocation by classes of investment, based on the client's situation and risk tolerance and on fundamental market conditions. He moves allocated cash into assets in each category when the technical charts show the stock is currently on sale. He exits automatically with a trailing stop, or by other technical factors triggering his exit. He includes a small percentage of negatively correlated funds to protect from downward swings.

Hope this helps!
 

MTF

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I'm investing for cash flow, and my rule is very simple: I never sell unless there's a dividend cut. This way, I couldn't care less about the stock's price as long as the dividend is stable (not an ideal scenario) or going up (preferable).

Perhaps I'm not getting the best total returns, but my priority is cash flow and it's dividends, not the wildly fluctuating stock price, that provide it. Also, I value peace of mind, and this approach is a perfect way to avoid unnecessary stress and stupid emotional decisions.
 

MidwestLandlord

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I'm investing for cash flow, and my rule is very simple: I never sell unless there's a dividend cut. This way, I couldn't care less about the stock's price as long as the dividend is stable (not an ideal scenario) or going up (preferable).

Perhaps I'm not getting the best total returns, but my priority is cash flow and it's dividends, not the wildly fluctuating stock price, that provide it. Also, I value peace of mind, and this approach is a perfect way to avoid unnecessary stress and stupid emotional decisions.

Same ^^

It's a cash producing asset. I don't fret too much over what I paid for it, as long as it still produces. The current value only matters if I sell the asset.

I also take a drop as an opportunity to buy more if it's a company I still believe in and I have the means to do so (not lately haha)

I typically use cash secured PUTS to purchase. I run PUTS all day long, if they expire, great. If I have to buy the shares, also great.

If I do end up purchasing the shares, I run covered calls with those shares at 1 standard deviation, so that if the gain is worth more than the dividends (roughly), they automatically get called away and sold.

Basically, I let the stock run in a range. Above that range forces a sell, below that range forces a buy. Simple, profitable, and easy to manage.
 
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MartijnS

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I'm investing for cash flow, and my rule is very simple: I never sell unless there's a dividend cut. This way, I couldn't care less about the stock's price as long as the dividend is stable (not an ideal scenario) or going up (preferable).

* Put's on devil's advocate outfit *
Div cut in the % ? or in the absolute $ amount?
If the % goes from 5% to 4%, but the stockprice increased 50% since then, would you sell?
If the % stayed at 5% for 3 years, but the stockprice from the moment you got in at $100, has steadily dropped to $40, would you stay in?
 

MTF

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* Put's on devil's advocate outfit *
Div cut in the % ? or in the absolute $ amount?

Absolute amount. If it's, say, $4 this year and $3 next year, I'm out. If it's $4 this year and more than $4 next year (ideally at least 10% up to $4.4 or more), I'm happy.

Other questions are irrelevant. I won't buy more if the price is too high, but I won't sell, either. As @MidwestLandlord said:

It's a cash producing asset. I don't fret too much over what I paid for it, as long as it still produces. The current value only matters if I sell the asset.
 

MJ DeMarco

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I never sell unless there's a dividend cut.

A good metric but be careful, usually when the dividend is cut the stock has already tumbled 25%.

I use a combination of methods to determine if I should cut losses...
  1. My current tax situation. Will banking a loss deliver a tax benefit and offset gains elsewhere?
  2. Has the business climate that the business operates within materially changed?
  3. What exactly has changed that caused the stock to go down? Is it cyclical, an overreaction to something, or something that is more permanent? (Think Radio Shack which had a big DIV)
  4. Health (and future demand) of the company's primary revenue generator. For instance, if you own SO, that would be power generation, but not just standard power, but alternative power. Are they looking to the future, or more of the same which the industry moves without them?
  5. Are the dividends actually "return of capital" (ROC) -- this happens in a lot of Closed End Funds and when I see that start to happen, I find it as a sign to get out. This saved me a lot of cash on the income investment FAX (which started to do this and I sold it right before it really started to take beatings.)
  6. Would you actually BUY at this price if you were looking to invest in the instrument the first time?
  7. Long term trend reversal (usually a sign of 2 and 3)
 
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MTF

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A good metric but be careful, usually when the dividend is cut the stock has already tumbled 25%.

Yes, I'm aware of the disadvantages. Still, I mostly invest in companies that have been increasing dividends for at least 10, and usually for more than 15-20 years, so the risk of a dividend cut is pretty low.
 

Danny Sullivan

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You can monitor the percentages of positions in your portfolio. If one get's too big in overall value, i'd consider selling some stock to distribute the capital gains towards other stocks.

A dividend cut is usually a red flag. I wouldn't sell if the stock price drops but the fundamentals of the company haven't changed - it's just Mr. Market doing it's thing - and provides chances to buy more stock.

Although Mr. David Fish passed away in May this year, his U.S. Dividend Champions List is still maintained and can be downloaded here : The DRiP Investing Resource Center - DRiP Information, Tools, And Forms or here Justin Law's Articles | Seeking Alpha .

Just a word of warning: i'd be wary with stocks of german companies, they're ususally playball to politics or dependent on government support.
 

Late Bloomer

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Long term trend reversal (usually a sign of 2 and 3)

Everything else in your list is fundamental analysis of the company. Are you not a fan of technical analysis? (I mean this as an open-ended question, in case it hasn't come up in the forum before. Or if there's already a forum about fundamental vs. technical analysis.)
 
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MJ DeMarco

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Are you not a fan of technical analysis?

Big fan of TA!

I use TA more so in short term trades relating to options trading.

I will use TA for dividend stock purchases only looking at longer term trends. The point of holding a dividend stock is to hold it for a paycheck, not to pop in and out just because a the momentum has declined or it went under its 10D MA.
 

mom

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Background: In putting together a projected plan on how to grow my excess business cash, I started looking for and investing in some reputable stocks to generate dividend (better than 0.1% interest in the bank), as well as some more "roulette" style stocks.

Now one of the (many) things that stuck from MJs book was a general approach (I know, not a rule, just a suggestion) for when buying dividend stock, that if the stock rises the equivalent of 3 years worth of project dividend, just sell and lock that in right away. Smart call, makes sense. That's a rule of thumb I'm implementing (didn't hit that 3 yr mark yet on any).

Question: However since stock go both up and definitely down, what do you do if it goes down? When do you stop the bleeding? If it went down the equivalent of say 1 years worth of dividend, and you didn't even get 1 quarters worth of dividends, do you just wait? Let it slip?

Wondering how other people deal with this? Any rules of thumb? What has or hasn't worked for you?
you lose your capital...

They forget to tell you this...

If you are going for dividends you are better of investing in Bonds
 

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