When Do you Sell a Stock: 6 Key Signals

Dividend Earner

Dividend Earner

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7 min read Affiliate Disclosure

Long-term investing doesn’t mean blind investing. It means your focus is on holding solid companies to profit over a long period. A long time is not forever either. It’s not until death do us part.

Once you add a holding to your portfolio, you must review it regularly to ensure your original investment decision still holds. I suggest doing it just after the earnings window every 3 months. Technically, the earnings are when you get meaningful updates from corporations.

The review leads us to this important question: When do you sell a stock from your portfolio? That’s a big question every investor asks at one point or another. Most investment advice seems to revolve around how to find and purchase new investments.

Screeners, fundamental, technical analysis, and market research are all designed to help you find winning investment ideas. Newsletters are filled with stock buying tips, and Wall Street analysts tend to issue much more buy than sell recommendations. It’s no wonder that knowing when to buy a stock can be much easier than knowing when to sell at the right time. 

Once you purchase an investment that does well over the long term, it can be easy to get complacent. Some people fall in love with their stock holdings, while others simply hang on longer than they should due to inertia or various other personal reasons.

Considering the importance of investing, we simply cannot ignore when to sell as external factors can always change the landscape. So, how do you know when to sell a stock? Various factors can trigger your decision to sell some or all of your stock holdings. Use those guidelines to build a winning portfolio.

6 Signals To Consider Selling

Below are some key points that you should take into consideration when you are reviewing your portfolio. You should have hard-sell rules like a dividend reduction and others are circumstantial rules. When selling a position, do note that you can always get back in.

Oftentimes, it’s not until you learn your investing lesson the hard way that you start clarifying your signals.

What you don’t want to do is be the last one to jump ship. Look at Transcontinental below. Do you want to be the last investor to jump ship? You will lose five years of returns by “hopping.” The dividend yield increased as the stock went down, but the sharp decline should have been your first sign.

A stop loss can help you protect your downside, but you can also sell and reconsider another entry point. There is nothing wrong with taking your profits out of play.

Signal #1 – Dividend Cut

If you are a dividend growth investor and the company reduces the dividend (i.e., a dividend cut), you may want to consider selling. Often, you will have warning signs that the dividend yield is high, but in some cases, it might not be the case.

The reduction might be an adjustment to company policy to maintain healthy finances. Back in 2017, Potash Corp executed two dividend reductions in the same year. The second one was too much for me. Today, Potash Corp merged with Agrium to form Nutrien.

Signal #2 – Dividend Yield Too High

A high yield is a preliminary sign that a dividend cut is imminent. It’s the investors showing they don’t believe in the company’s payout based on the price they are keeping the stock at.

Look at the graph below and notice the trend change in 2013 where I switched out of high dividend yield and into dividend growth. My portfolio had no dividend cuts (see next signal) during the Covid-19 crisis except for The Walt Disney Company.

A good rule for them to understand if the dividend yield (or distribution) is too high, compare it with its sector and industry peers. If it’s far above the average, it should be a warning sign. Try to understand why it’s high and listen to or read the latest earning reports.

Signal #3 – Sharp Stock Decline

If there are no other signs, someone saw something, and it’s not smooth sailing. It can be prudent to sell your position first and ask questions later.

Signal #4 – CEO Departure

If the CEO leaves the company without a long-term strategy and enough lead time for the transition, you know something is not working out with the company’s leadership or board of directors. If the company leaders are not aligned, the business will struggle.

Signal #5 – Industry Changes

Many successful blue-chip dividend growth stocks have wide “moats” or economic barriers that keep competitors from entering their markets. Patents, brand name strength, or technology can give a company an advantage and ensure healthy sales, profits, and dividend payments.

However, nothing stays the same, and economic advantages can shrink or disappear over time. Pay attention to industry changes that negatively affect your investments. Consider trimming or selling stock holdings if it appears that the company will not benefit from new industry developments.

In some cases, the company will stagnate as it tries to pivot the business. In such cases, your money may be dormant for some time, and you may want to put it to work elsewhere.

Signal #6 – Changes In Fundamentals

Deteriorating company finances can be a big red flag. Dividend investors should pay particular attention to sales, earnings, and cash flow. Yield is one of the most essential criteria for dividend investors. Dividends will typically be one of the first things cut when a company begins to experience cash flow problems.

Another key indicator can be that the EPS is not keeping up with the dividend payments, and the payout ratio is not sustainable for the company. Sometimes, you can identify that by comparing it with the other companies in the same sector or the historical average for the stock.

Portfolio Strategies Can Trigger a Sell

There are hard sell triggers, but there are also soft triggers that are not related to the stock but to your portfolio.

Regular Rebalancing

Rebalance your portfolio regularly. It is a disciplined way to ensure you stay on top of selling your stock. For example, let’s say you decide to keep 20% of your portfolio allocated to three large-cap dividend-paying stocks. Schedule a rebalance every three or four months and trim any holdings that have appreciated and skewed the percentages. You may also consider adding to positions that have fallen below their target allocation.

If Overweight, Then Reduce Your Position

Many workers accumulate stock from their employer in a qualified plan like a RRSP or 401(k). Matching programs are like free money and can be a good way to build wealth. Keep in mind that concentrations can be a good way to build wealth, provided the stock is strong and appreciates. But after a while, these regular stock contributions can grow too large and may add unnecessary risk. Review your accounts every quarter.

Trim your concentrations or sell all of them, depending on your comfort level and circumstances. Don’t fall in love with your company stock and treat your Employee Stocks the same you would treat the rest of your portfolio investments.

Overvalued Stock

If the value of the stock becomes overvalued based on your investing rules or philosophy, you may want to take a profit. I set a maximum portfolio exposure for one stock to 6%. If one stock goes over 6% for an extended period of time, I will trim and deploy the profits elsewhere.

Better Alternative

We cannot expect to know all of the companies out there, and while we may be satisfied with our current investments, a better alternative may come along. For me, blue-chip dividend growth stocks became better alternatives than some other holdings I had a few years back.

Knowing when to sell a stock is an important part of portfolio management. Just be aware of the risks, watch for red flags, and pay attention to the company and industry changes. And don’t hesitate to sell quickly if needed.