Recent Sale

Well, for the second time in three months I have sold out of a position. I’m a little surprised about it, because honestly I do buy stocks with the plan of holding on for the long-term. But, things change and as a small investor in a big market I have to stay nimble and open minded. I don’t believe in holding on to stocks simply for the sake of holding. If the stock, and company behind the stock, keeps doing what I purchased it for then I generally hold until a reason to sell presents itself. I usually only sell a dividend growth stock if the fundamentals of the company change, the dividend is held static or cut or the stock has become grossly overvalued. Although the stock I sold didn’t become grossly overvalued, I felt that a nice run-up occurred and the yield had fallen to a point that I felt was unattractive. I decided to book in my gain and I plan on using that capital for other opportunities.

I sold all 33 shares of my holdings with Exxon Mobil Corporation (XOM) on 2/22/12 for $86.85 per share. I originally purchased my entire lot of 33 shares on 6/9/10 for $60.69 per share. It was one of my first dividend growth stocks, being purchased shortly after I began my journey to financial independence through dividend growth investing in early 2010. Some investors might have a sentimental attachment to one of the first stocks they purchased, but I simply do not share that trait. I look at stocks qualitatively and quantitatively, but not emotionally (or at least try not to). I decided to book my 43% gain due to a couple of reasons.

First, oil, as a commodity and product, is riding multi-year highs right now. High gasoline prices can be seen and heard on every news program. I don’t know where oil is going from here, and I’m bullish on oil long-term. However, I don’t know how much upside XOM has from here, but I feel now is a good time to pull out of this position and use that capital for other opportunities.

Second, energy as a sector, in the form of oil majors, made up almost 20% of my portfolio until this sale. I felt that was just a tad high for one sector, as any major change in oil could have an overweight effect on my portfolio. Since I sold XOM, energy is now closer to 14%.

Third, and the biggest reason, is the fact that XOM is currently sporting a 2.16% yield. I asked myself if I would invest in XOM with the current yield being so low, and I decided that I would only invest if the dividend growth supported a large YOC within a short period of time. But, XOM actually has a fairly low dividend growth rate for sporting such a low yield. The 10-year DGR for XOM is a paltry 7.4%, and it’s actually slowing down. I simply cannot make that work for me. I don’t mind investing in a company with a yield below 2.5%, but generally do not. However, the DGR has to be high enough for me to warrant an investment. I felt the run-up in XOM shares, coupled of course with the low yield as a result, forced me to look in other directions. With a yield of under 2.5%, I would prefer a dividend growth rate in the mid-teens or higher.

I feel XOM is a solid company and a solid investment, but with such a low yield and also low DGR, I think my capital would be best used in other places. If XOM falls, and the DGR rises, it would then make a suitable investment once again. XOM has a rock-solid balance sheet, and is one of the best supermajors out there.

I plan on holding on to my other three oil stocks (TOT, CVX, COP) for now.

I’ll update my Freedom Fund in early March to reflect the recent sale of XOM.

What about you? Booking any gains?

Full Disclosure: Long TOT, CVX, COP.

Thanks for reading.

Photo Credit: jannoon028

Comments

  1. says

    DM, XOM has a higher shareholder return than the dividend would indicate because XOM has bought back 10s of billions worth of shares. However, this doesn’t necessarily translate into higher prices. COP has essentially the same return over the time period with a much higher yield.

    I’m on the side of higher dividends versus buybacks. XOM should shift the balance IMO, shareholders would benefit more.

    • says

      SFI,

      You really touched on something there, that I forgot all about. I meant to mention my distaste for XOM’s continual preference for buybacks over dividends and its strong preference for continuing that trend. I like share buybacks, but I much prefer dividends.

      I really meant to include this as a relatively small reason I sold XOM, but forgot due to my writing this article so late yesterday evening.

      Thanks for adding that, as I think it bears inclusion in the discussion of XOM as a viable investment.

      Best wishes!

  2. says

    Honestly DM, this is one of the areas I need the most work on; when to sell. I say that it is when there is a fundamental change in the company, but that’s just a default statement and I need to put a little more effort on when to sell.

    I think you have a solid strategy of taking gains and applying them to more valuable dividend positions. Over the long term that kind of activity can only optimize your portfolio. Keep on doing you thing DM, it’s working!!

    • says

      The Stoic Investor,

      It’s an area I also need to work on, as I am pretty firm on my purchases and my “feelings” when I buy a stock, but less so when I’m thinking about selling. I tend to “waffle” a bit on it. I feel pretty confident about my sale of XOM, however. The yield and DGR is simply unattractive right now.

      Thanks for the vote of confidence and reassurance. It’s much appreciated.

      We’re learning and growing together. That’s what it’s all about. Take care!

    • says

      The Money Monk,

      Pigs get slaughtered, right?

      The only tough part about selling a dividend growth stock that had a nice run is then finding opportunities to put that capital to work in. It’s hard in this market to find attractive opportunities, but I still see some on the horizon.

      Best wishes!

  3. says

    Great Job taking 43% profit. You said you bought the 33 shares in 6/9/10 and sold 33 shares on 2/22/12. It paid several dividends during that time. Did you not re-invest the dividends or kept them as cash and bought other stocks? If you did the later can you explain why? newbie here just trying to learn. What is on your watch list to redeploy the cash and to get it working or is it in a money market account until you decide to pull the trigger? Thanks for entertaining my question.

    • says

      jdavis4982,

      Thanks! You caught me a little on that, as I did not include dividends in my calculation. I should have.

      As for the dividends received, I always let the dividends accumulate for a month and combine that capital with money I make at my day job. It’s with these combined sources of capital that I make my monthly purchases.

      I lay out the how’s and why’s in my DRIP article that you can find on the right side of the page.

      As for my watch list, there are many. I’m going to narrow it down to 3-4 stocks over the next couple days and possibly make a purchase before the end of Feb. We’ll see.

      Take care!

    • says

      MoneyCone,

      You said it right there. Never fall in love with investments. I try not to let emotions play into my decisions, which can be difficult. I try to take a view from 30,000 feet when possible.

      Thanks for the congrats.

      Hope all is well for you! Take care.

  4. says

    Just yesterday I sold my position in Boyd Group, a company in Canada that is now one of the largest autobody repair shops in North America. I bought in under 2 years ago, and by the time I got out, including dividends, it had returned 126.4%. My rational was pretty much the same as yours…with gains like that, any future gains in capital were going to be limited, and the dividend yield, while nice (just under 4%) wasn’t promising future growth.

    I used the proceeds to buy into a Canadian apartment REIT, as I believe Canada’s housing situation is going to favour rental units over the next few years (we’ve had a housing bubble, and our home ownership rate is at a peak), and given this REITs history and my familiarity with them (I used to rent from them), I see potential for future yield gains.

    • says

      Canadian REITs. I own NLY and I also have O both are U.S. based companies. By buying into a Canadian REIT what are the tax implications (do you pay a candain tax and us tax on that dividend?) and do you lose money when they do the currency conversion?

    • says

      Neu,

      Great stuff man! You’re taking a monster gain and reinvesting it into another attractive opportunity that can provide further gains. Talk about compounded growth!

      Sounds like you’re right on track. Best of luck with your investments!

    • says

      @Jdavis4982:

      Honestly not sure for US residents. In Canada, REITs have a tax advantage on distributions as they are not considered the same as Dividends, but consequently, they cannot list on US exchanges, so I don’t quite know how to answer your question.

      On currency conversion, I honestly think now would be a bad time for picking Canadian denominated stocks or funds…the Canadian dollar is near par, and that’s with everything going in its favour. Oil and commodities are doing well, our interest rates are higher than those in the US, and our economy is viewed as more solid, and still we’re at par. As far as I can see, we’ve got a little currency upside potential but a lot more downside. I’ve actually been converting Canadian to US as available recently so I can buy more US stocks, as I think the Canadian dollar strength will last a bit longer, but I don’t see that as something that will continue.

  5. says

    DM, you’re bullish on energy so I would think that XOM would be a major holding. But then again, your instincts and analysis alerted you to sell TEF before its dividend dilemma. No one ever got hurt taking a profit. And a nice on to boot!

    I’m still long XOM. I see them around 20 years from now as a leader in energy, be it oil, natural gas, or alternative energy.

    • says

      Henry,

      I’m very bullish on energy. XOM, however, is not the best play at current prices in my opinion. I just think that low yield and low DGR is unattractive. Their continual preference for buybacks is also not aligned with my views. I think it’s a great company, and I’m sure it would make a fantastic investment over the long-term.

      Like I said, if the price falls and they become more committed to growing the dividend as a larger portion of earnings I would definitely be back on board in a heartbeat.

      At current prices, I would prefer CVX and COP.

      Best wishes!

  6. Jason S says

    DM…would you consider BP as a replacement? BP is sporting a ~4% yield since they were hammered due to the spill. Additionally, although they had a culture of consistent dividend increases, they caved to political pressure and cut it to settle…which is why their market price tanked. With this in mind, could be an opportunity for getting in at a good yield…and significant dividend increases to get back to their culture of dividend increases.

    • says

      Jason S,

      Good call on BP. It’s an interesting, but risky, play in oil. I think it could be a fantastic investment, easily allowing for double-digit gains. There are just still a lot of questions surrounding the spill, and I don’t have a lot of answers on that. If the spill costs end up lower than expected, then BP could be a knock-out. It’s really hard to say. There are just a lot of clouds surrounding BP, but long-term it looks pretty solid.

      I would consider BP as a small play, especially if I didn’t already own three oil companies.

      Keep me updated if you go long on BP. It’s one I’ll be watching.

      Best wishes.

  7. Anonymous says

    I second that on BP. I’m up 19% since buyer BP last year, and it is still cheap. And I also think they will continue raising the dividend at a healthy clip. It gives me some currency diversity from my predominately US portfolio, and the Brits don’t take a tax withholding.

    • says

      Anonymous,

      Good call on the withholding tax. That’s one reason I invested in Vodafone. High dividend, and no foreign withholding taxes…which is very nice.

      I think BP could potentially be undervalued significantly, even considering the high price of oil, but the questions add risk. I think BP is a good fit if your risk profile is fairly high. I tend to be fairly conservative, especially for my age. This is probably due to the fact that I plan on retiring at such a young age. Capital preservation is #1 for me, but you do wonder how much downside BP really has in the mid-$40’s.

      Best wishes!

  8. says

    Hi DM,

    Congrats on booking a nice profit. Your reasons for selling XOM are sensible. Even though it’s a well-run company, their (over)emphasis on share buybacks and somewhat disappointing dividend-growth rate (considering their profitability) have kept me away.

    I’m underweight in the energy sector (all I have is CVX), so it’s an area I hope to add to in the future. COP interests me, but I will likely wait until after the split to see what happens dividend-wise there. I need to do more research on some of the other stocks in the sector.

    I look forward to seeing what you buy next!

    Take care,

    Deedubs

    • says

      Deedubs,

      Thanks for stopping by.

      Yes, the preference for share buybacks are bothersome and, in my opinion, not necessarily as well-aligned with shareholder interests as dividends. That is highly debatable depending on who you ask though. For now, I’ll search for a higher yield to give my portfolio a little boost in that department.

      As for what I’m buying next, it’s hard to say. I may hold on to a larger cash balance than usual until next month, which would be unusual for me. It’s tough to find value out there. I see a few here and there, but it’s difficult.

      I am looking in the direction of utilities currently. Although they had a hell of a run in 2011, so did most of everything else. The difference is that utilities have been weak for Q1 2012. UNS, AVA, DUK and SO are all possibilities. I’m not a huge fan of utilities, but with the lack of value and lack of my exposure to that sector currently it might make a good fit.

      Anything catching your eye currently?

    • says

      Coincidentally, I have also been looking at utilities a bit lately. Your list is pretty good; NEE also comes to mind. Like you, I’m not particularly enthused about utilities, but the lack of value elsewhere is challenging.

      My watch list is always in flux, but I suppose the top 3 stocks on it (that I don’t already own) are AFL, RTN, and VOD. I’m wary of financial stocks in general, partly because I have trouble analyzing them, but AFL seems to be one of the better ones. I think RTN might be a nice complement to my GD position, spreading out my risk in the defense industry. Similarly, I think VOD would complement my T position, plus give me some international exposure in telecom.

      I’m not sure whether I’ll be buying anything for the rest of February, though. I may just wait until March for that elusive pullback.

    • says

      Deedubs,

      Your list is also good. I like AFL, VOD and RTN. I’m long VOD and AFL, and AFL is already a fairly large position for me. I’m open to adding to VOD. I think it’s one of the best telecoms in the world, especially seeing as how most of their business is wireless, so they lack the legacy costs of other telecoms. I agree that it’s a nice compliment to T, with international exposure along with their 45% ownership of Verizon Wireless.

      AFL is also a nice play, and although it’s been cheaper it’s still a solid value long-term here.

      RTN is one I missed the boat on a bit. I mentioned it multiple times on this blog when it was around $40-42 and ended up passing it up. Of course, at the time there was a lot of value out there. RTN simply rose with the tide. I think it’s a solid defense holding, with a pretty strong yield. The product lineup is also very interesting.

      I like NEE. If I was to do Florida utilities, TE looks good there too. I’m with you, and not particularly enthused about utilities, but wouldn’t mind owning small positions in maybe 2-3 utility companies for the yield and defensive nature. Plus, they actually have nice runs here and there (like ’11). The heavy regulation and debt loads leaves something to be desired, however.

      I may wait until March as well. We’ll see.

      Good talking, I always enjoy discussing ideas!

    • says

      I think utilities right now are probably the best value investment, they had a good run last year, but they’ve taken a bit of a beating this year. Everyone needs electricity and that isn’t going to change. Even if there is another recession, while demand will drop industrial side, people need to keep the lights on.

      I am a bit overexposed to utilities, as I have four in my portfolio, three Canadian (CPX, INE and AXY) and Duke Energy, which you mentioned. I thin Duke is a good play due to the upcoming merger with Progress, which will make it the largest US utility. As they plan a 3-1 reverse stock split after the merger for regulatory reasons (Duke’s float combined with the Progress takeover means they pretty much have to), I think now is a good time to be stepping in, I’ve already increased my Duke holdings once this year and may try to do so again.

  9. says

    Heyo,

    Always good to read what you got going on. Good call on the XOM sell. I never bought either because of the low 10 year Dividend growth rates, good time to dump the stock, with some nice capital appreciation.

    I will qualify the concept for me, though: I bought VFC at around 80, and now it’s 145, almost double…However, I will not sell, because I believe it is a huge, diversified clothing company. I believe it will keep paying me dividends for years and years to come. Therefore, Even though there is some good short term gains to be had, I bought it for the long term dividend cash flow. It would be akin to me selling KO in the late 90’s- sure, the stock was terribly overvalued, but what a steady dividend machine. Whereas XOM is a little bit stingy with the raises, so sell away, says I (7% growth isn’t terrible, but we could do better).

    The market is a bit top heavy now, but I have bought lately. LO, KMB, UL, RBGPF are pretty decent in the sense that the yields are pretty nice. UHT. KMR. I bought PEP around when you did. It’s a good life.

    • says

      Relic,

      Heyo. Always good to hear from you!

      I’m with you on your concept. For instance, MCD, KO and PM are way up for me as a group, yet I won’t sell any of them. I still think there is a lot of growth ahead of them, and they all maintain pretty stout dividend growth rates, along with pretty solid yields as they sit.

      XOM never had a high DGR, which is why the yield continued to slip as the share price advanced. If XOM maintained a DGR of 10-15%, I’d still be holding.

      It’s funny you mention KMB and UL. I’ve looked at both lately. KMB hasn’t run up as much as some other consumer stocks. Solid yield there. UL also looks favorable. PEP is a good value now, basically flat lining over the last two years.

      It is a good life! I think we’re doing pretty well here man.

      Keep in touch!

  10. says

    I have been thinking about adding more energy to my portfolio, but wonder if I should wait for a slight pull-back. I have Seadrill as an energy/dividend play which has done well, but was watching gas prices increase.

    • says

      cashflowmantra,

      It’s hard to know where oil/energy is going from here. I’m bullish long-term, but you wonder how much resistance it has at this point. I don’t know how much higher it can go short-term, but I mainly sold XOM for its low yield and low DGR.

      A lot of people are expecting a pullback in the general market. If you believe in that as well, I would probably hold out for better prices.

      Best wishes!

    • says

      Bill,

      I honestly don’t follow CME, so I can’t really give you any advice on that one. I don’t follow a lot of financial stocks, especially exchange stocks. I do follow insurance stocks, and just a few large banks…but that’s about it.

      I’m sorry.

      Take care!

  11. Jeannine says

    I just bought seadrill because it has the unusual combo of a growth stock with a nice dividend. I don’t think you would like it though, DM, because it’s heavy on the debt ratio. It’s a new company and growing fast with investments in its deep sea oil drilling rigs. Didn’t put a lot into it, but I was encouraged to see someone else on your blog mention it. Good luck with your next purchases!

    • says

      Jeannine,

      There are a lot of fans of Seadrill and the management behind it. I know that the CEO is a bit of a “maverick”, or at least that’s how I remember him being described.

      Not my cup of tea, but it could turn out to be a fantastic investment and isn’t that really what we’re all looking for?

      Best wishes with your investment!

  12. says

    Sounds like you put a lot of thought into the sell. Nice gain! I agree with you CVX gives a better yield and grows its dividend faster. They even decided to raise dividends twice in 2011. I hope the trend continues.

    • says

      Compounding Income,

      Thanks for the support!

      Yes, in energy CVX is preferable here to XOM in my opinion along with COP. I think both are fine additions, although both have had a nice run as well.

      Best wishes!

  13. says

    Hi DM….

    very clear and well reasoned post here. given your objectives and analysis, taking profit in XOM makes great sense.

    as you know from our conversations on another blog, I let Index Funds do the heavy lifting in my portfolio. That said, I’ve also admitted to still playing a bit. Moth to flame.

    Last year my theme was div stocks as they tend to do will coming out of a bear. I bought five in 11/10 and sold all but one last month. So, owning these 14 months or so:

    BMY +23%
    SO +18%
    VZ +19%
    FE + 19%

    While I was buying for the cap gain I, of course, collected the divs along the way for around 4-5% each.

    I also had a trade in NFLX: bought 10/31/11 sold 11/4/11. four days+ 17%. Looking at where it is now I should have held it, but given the ride it’s taken on the way there the stress would have killed me. :)

    RAI is the fifth I bought in 11/10 and I still hold it. It has been the star of the bunch and it is the only individual stock I still own.

    From here I think div stocks will have a slower go compared to the overall market, but my guess is 2012 will be a very good year for stocks.

    • says

      jlcollinsnh,

      Sounds like you had some winners there. Good stuff! Nothing wrong with index investing, in my opinion. I can see how it’s attractive to invest in the general market with low fees, I just prefer dividend growth investing.

      I agree with you on that last part. The word “dividend” was all over the internet and news programs last year leading to some DG stocks having quite a run, especially late last year. I do hope some of those investors rotate out of these stocks and back into growth stocks which will leave me attractive opportunities.

      Good luck to you in 2012!

      Take care.

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