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investor clinic

I know you promote buy-and-hold dividend investing, but there must be times when you decide to sell a stock. What factors do you consider when making a sell decision?

First, I'll tell you what I don't consider: How much the stock has already risen.

Recently, a neighbour asked me if she should sell shares of a particular transportation company because they had doubled in value. It's as if she was expecting gravity to kick in at any moment.

"The fact that it has doubled is not a reason to sell," I told her. "What matters is what you think the stock will do from here."

You'd be surprised how many people think like my neighbour. They get anxious when a stock posts a big gain, and they end up making a decision based on emotion. A few years ago, a friend of mine owned shares of Telus. He bought them at about $30 and the price was rapidly closing in on $40. Not wanting to put his paper profits in jeopardy, he sold.

Telus is now trading at close to $70.

The lesson here is that, unless you think a company's outlook has changed for the worse, you probably shouldn't consider selling it.

As a dividend investor, there are a few things that set off alarm bells for me. If a company goes for several years without a dividend increase, that can be a bad sign. A dividend cut is also a red flag: Investors who sold immediately after Manulife slashed its dividend several years ago, or after Yellow Media began chopping its payout, would have saved themselves a lot of misery, because the stocks continued falling after the dividend cuts.

Another reason to consider selling is if there has been a fundamental change in the industry, such as a fundamental change in the competitive landscape or a new technology that threatens the company's profits. Yellow Media's undoing was the Internet, which broadsided its paper directories. It didn't take a genius to see this coming; unfortunately, some analysts kept recommending the stock on the way down.

I like to use Warren Buffett's 10-year rule: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." If you stick with companies that you are certain will be thriving 10 years from now, you can avoid most disasters.

That said, it's not always clear when selling is the right decision.

"It's relatively easy to buy investments. The selling part of the decision is the gut-wrenching one – often full of fears and second guesses," says Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver.

For example, people might worry that a troubled company will turn things around, sending the stock up after they sell it. This can cause them to hang on longer than they should.

According to Mr. Mastracci, some valid reasons to sell include:

  • The company’s fundamentals have changed;
  • The valuation is stretched;
  • You need the money;
  • You need to rebalance to your asset allocation targets;
  • Some tax-loss selling would be advantageous.

"A smart move is to set and decide your selling strategy before you buy," he says. This will remove – or at least minimize – the role of emotion from the decision.

Perhaps the most important thing to keep in mind is that, if you choose your stocks carefully, you will be less likely to suffer a disappointment. By focusing on dividend-paying stocks such as banks, pipelines, utilities, real estate investment trusts, telecoms and consumer companies with strong franchises and good growth prospects, you reduce the risk that one of your stocks won't work out.