Last time, we covered one of the questions I get asked the most: when to sell a dividend stock. As you saw, I base that decision on the fundamentals of each stock.

Sometimes, that can be difficult – especially when a stock has gone up, and you have to decide between the possibility of more gains, or cashing those gains out. So today, I cover when to sell a stock to lock in a profit…

New Dividend Hunter subscribers often ask about my criteria for selling a stock. Most are looking for some percentage loss or gain on a stock as a trigger to sell. I stay away from any rules not based on the underlying fundamentals of each recommended investment.

Over the years, I have found that the annual portfolio turnover for the Dividend Hunter portfolio averages about 25%. To me, with a buy-and-hold investment strategy, that number seems high, but it is surprising how the investment outlook for companies can change. Over eight years of Dividend Hunter investing, there has been about an equal 50/50 split between stocks sold for a profit and those on which we took a loss.

The reasons to sell fall into three distinct categories. I will cover each reason in a separate article. Today I cover when to sell a stock to lock in a profit.

The Dividend Hunter strategy primarily focuses on generating a stable and growing high-yield income stream. I do not include capital gains in my return expectations. When I add a new stock to the recommendations list, I expect the investment to be a long-term position, paying quarterly dividends, year after year. As a result, it takes extraordinary circumstances for me to send a sell recommendation on one of the Dividend Hunter stocks that had previously performed well.

On occasion, one of our high-yield stocks will catch the attention of investors, and the stock price will significantly appreciate. One example was EnLink Midstream (ENLC). My subscribers loaded up on this stock in the summer of 2020, when it traded between $1.00 and $3.00 per share. During those days of the pandemic shutdown, EnLink remained committed to paying a dividend, and the shares yielded in the high-teens to low-20s.

The stock was a big winner for my subscribers, who stuck with the plan through the first years of the pandemic. I recommended selling ENLC in April 2022, when the share price topped $10.40, and the yield was just over 4%.

The low yield was my trigger for selling. When the yield of a dividend paying falls below what is typical, especially for a higher-yielding stock, I view the stock price as overvalued. When I recommended selling ENLC, its peer midstream stocks yielded 6% to 8%.

Although ENLC is a great little energy midstream company, selling the shares at a 4% yield and reinvesting the proceeds into a similar stock with a higher yield provided an immediate boost to subscribers’ income streams. With the sale of ENLC, I recommended the purchase of ONEOK, Inc (OKE), another high-quality midstream company. OKE yielded 7.5% at that time, so the exchange produced a 75% boost to dividend income.

Under the Dividend Hunter strategy, my reason for selling a highly appreciated stock is always to lock in the gains before the share price drops, resulting in a more historically typical yield. For the yield to rise, the share price must fall. At the same time, I want to invest the sales proceeds at a higher yield, giving an immediate boost to our portfolio income.

— Tim Plaehn

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Source: Investor Alley