62 KIPLINGER’S PERSONAL FINANCE^ 05/2019KE
VINCHILDER
SYOU’VE HAD SOME GOOD TIMES
together. You’ve had some
bad times. Now you have to
decide if it’s time for your
stock to start seeing other
people. Selling isn’t easy,
especially if you’ve been
together for a long time.
The best reason to sell a
stock is that it’s no longer
doing what you bought it to
do, such as deliver increas-
ing levels of sales and earn-
ings. “You won’t know when
to sell unless you’ve come
up with a sell plan before
you buy,” says Stephen Du-
Four, manager of Fidelity
Focused Stock Fund.
If a stock you bought for
its growth prospects misses
Wall Street earnings expec-
tations, for example, you
should keep your eye on it—
but you probably shouldn’t
push the sell button right
away. If that stock suffers a
string of quarterly misses,
send it to Palookaville. Kraft
Heinz saw its earnings fall
for three quarters before
posting a stunning $12.61 bil-
lion loss for 2018 in February.
Don’t hesitate to look
at analysts’ research, often
available free from your
brokerage, as you try to
figure out what’s wrong.
“It could be a structural
problem with the company,
and that’s where you should
rely on others to help you,”
says Randy Frederick, a vice
president at the Schwab Cen-
ter for Financial Research.
The stock’s price moves
might also give you somehints. If it falls below its
average price for the past
50 days, for example, then
other investors are having
doubts about the stock, too,
and it’s time to look for a
reason (see “The Magic of
Moving Averages,” March).
The main concern for
income investors should be
that a stock continues to pay
dividends—and, preferably,
boosts them regularly. Onered f lag is a dividend yield
that is several percentage
points above that of similar
stocks, which happens more
often because of a sinking
stock price than increasing
corporate generosity.
But if the company has
enough money to continue
paying the dividend from
earnings—and not by bor-
rowing—then keep the
stock. The dividend payout
ratio, calculated by dividing
dividends per share by
earnings per share, is aquick test to see if a firm
can afford its payout. A rule
of thumb says a payout ratio
above 55% is a red f lag, but
payout ratios vary by indus-
try, so it’s key to compare
your stock’s ratio with other
stocks in the same industry.Too much of a good thing.
Another good reason to sell
a stock is if it appreciates so
much that it becomes toobig a piece of your portfolio.
That’s particularly true if
you get stock as part of your
compensation. Then you’re
putting both your invest-
ment capital and your hu-
man capital (your job) in
your company’s hands.
Some investors set a limit
on how big a part of their
portfolio any stock should
be. Fidelity’s DuFour tries
not to let any stock count
for more than 5% of assets.
Tom Plumb, manager of
Plumb Equity Fund, startsto get uncomfortable when
a stock gets to 10% of the
portfolio. You should cer-
tainly consider trimming
back a stock that is more
than 15% of your holdings.
Rebalancing, or selling
shares of your winners and
investing the proceeds in
your laggards, is a simple
way to reduce overly appre-
ciated positions.
Try to resist the urge
to dump a stock if it hits
the headlines for the wrong
reason. Often, that’s a good
time to buy, not sell. Nike’s
s tock teetered, then snapped
back, after Duke Universi-
ty’s Zion Williamson’s shoe
fell apart during a critical
basketball game. Boeing’s
woes are far more serious—
more than 300 people have
died in two crashes of its
737 Max since October. The
cost to Boeing could reach
into the billions. If you own
shares, hang on; new buyers
should wait for more clarity.
If a stock runs up after
you sell or trim it, you’ll
feel like a clod. Don’t. If you
trimmed an outsize holding,
you reduced your risk. If
you take a loss when you
sell, you’ll get some consola-
tion from the tax man. You
can use your losses to offset
capital gains in other hold-
ings. And if you sell at a
profit and have to pay capi-
tal gains taxes, don’t com-
plain—it’s a sign you’re
doing something right.
CONTACT THE AUTHOR AT JWAGGONER@
KIPLINGER.COM.How to Break Up With Your Stock
INVESTING CommentaryPRACTICAL INVESTING John Waggoner