Should You Buy Low and Sell High or Buy Low and Hold?

investing decision
A reader asked:

"When you buy dividend paying stocks do you usually hang on for ever or are you buying and selling stocks every few years. The problem I have is if you own a stock lets say Canadian Utilities (CU) on the TSX that I have purchased years ago and am getting probably 7% in dividend yield now would you hang on forever even if it seems to be in a decling trend now?"

When I buy dividend paying stocks, I am essentially buying a stream of increasing income. I focus on companies that consistently grow their dividends. I know some people like to buy low and sell high, but this way you can not take advantage of the consistently growing dividends. I used to buy low and sell high, now I buy low and hold for the rising dividends.

I'll give you my personal example of TransCanada (TRP) on the TSX:
  • In 2000, I purchased 185 shares of TRP at $13.40 each, and the annual dividend was $0.80. The dividend yield was 5.97% ($0.80 / $13.40).
  • 5.97% represented the return on my investment of $2479 (185 shares x $13.40)
  • TRP increased the dividend each year since 2000
  • Today the stock price is $44 and the dividend is $1.76, this represents a yield of 13.13% ($1.76 / $13.40) on my original investment of $2479
  • Since 2000 I have received $2786.06 in dividends from TRP
  • If I was to sell today the return including dividends would be 340.74%
Between 2000 and 2012 the TRP stock did fluctuate, if I sold low and bought high, I don't believe:
  • it would have yielded 13.13%
  • it would have returned over 340.74%
  • I would have received $2786.06 in dividends
Here is some more information about Warren Buffett's thoughts on long-term holdings:

Reduce Portfolio Turnover

Rapidly trading in and out of stocks can potentially make an individual a lot of money, but according to Buffett this trader is actually hampering his or her investment returns. That's because portfolio turnover increases the amount of taxes that must be paid on capital gains and boosts the total amount of commission dollars that must be paid in a given year.

The "Oracle" contends that what makes sense in business also makes sense in stocks: An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business. Investors must think long term. By having that mindset, they can avoid paying huge commission fees and lofty short-term capital gains taxes. They'll also be more apt to ride out any short-term fluctuations in the business, and to ultimately reap the rewards of increased earnings and/or dividends over time.

Remember each time you sell you will incur capital gains.

I took a look at CU, and they have increased their dividend each year since 1997 except for in 2007 when the dividend was cut. Personally I would probably keep CU if:

  • business is sound
  • the EPS continues to grow
  • the dividend continues to grow
  • the debt remains low
  • the credit rating remains good
Now I only sell stocks if:

  • the business is in decline (high debt, dividend cut, reduced earnings, consistent high payout ratio)
  • I need the money
  • better opportunities exist elsewhere
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1 comment

Ken Faulkenberry - Arbor Investment Planner

You make an interesting point that I agree with; but only on "core" dividend growth holdings. I have dividend stocks in my portfolio that I consider "core" holdings. Typically I hold 3 - 5% (5% max.) positions in "core" holdings. These are stocks I will only sell when something fundamentally changes or the position grows so large it violates one of my diversification rules. Core dividend stocks are the most difficult to find.
I also have smaller positions in dividend stocks that may have special situations such as extraordinary valuations. These stocks may be slightly more risky (but not necessarily). I don't consider these buy and hold stocks. I may hold them and collect a dividend only as long as the stock is undervalued.
Buy low, sell high or buy and hold should depend on the type of dividend stock you own.

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