A time to sell good dividend(asset) shares?

Discussion in 'Share Investing Strategies, Theories & Education' started by ilori, 5th Aug, 2008.

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  1. ilori

    ilori Well-Known Member

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    Hi, wondering if anyone has thought if there is an advantageous time to sell asset/cash flow shares?

    With real estate there is the idea of buy & hold - receiving rent income, then borrowing against increased equity (access capital gain without selling and triggering CGT event).

    Same idea can be applied to shares - 'asset' type shares (ie. not trading shares) can be held to receive dividends, and borrow against the increasing value.

    QUESTION IS - is there a time when it's prudent to sell the asset type shares rather than continue to hold for the income stream? The buy & hold idea makes more sense to me with real estate, but due to the variable nature of shares, wondering if there is a time when they should be sold?

    Example - (just using round numbers) - if buy shares at $5 per share on a 10% dividend - nice to have. But what if this happens...

    * share price goes up to $10 quite quickly - does it make sense to sell because of the strong gain? (You lose the income stream, and pay CGT, but the gain is well beyond the 10% income stream.)

    * we decide to NOT sell when it goes to $10 (hoping...), but then it starts to fall - $8 per share, $7, $6, $4, $3? $0.50?... at what point to we get out (if any)? Do we keep the safe 10% income stream at the expense of the capital gain or uncertain value? Note, this also affects our ability to borrow against the share.

    Wondering if anyone has played around with this idea? Is there a mathematical approach to it – so an unemotional decision can be made?

    Thanks and regards,
    Ilori :)
     
    ilori, 5th Aug, 2008
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  2. Tropo

    Tropo Well-Known Member

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    Tropo, 5th Aug, 2008
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    I think if buying for long term returns and for dividend income, then diversifying the portfolio will help smooth out the returns - use either a low cost ETF/index fund, or perhaps an imputation fund for more tax effective income. An income fund like Navra also works well - less volatility with good income returns.

    If buying a single share - I think you need to watch it much more carefully for changes in fundamentals ... even good blue chip companies can have periods of poor performance which have a negative impact on profits, hence dividend payments (and hence share price!).
     
    Simon Hampel, 5th Aug, 2008
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  4. samaka

    samaka Well-Known Member

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    The main issue you will have with shares vs property in your example, is that borrowing for shares will expose you to a margin call.

    Buying an ETF like STW will give you exposure to the ASX200. You can even partake in the dividend re-investment plan - so those dividends will automatically reduce your LVR - which is a good option if you don't need them to fund holding costs.
     
    samaka, 6th Aug, 2008
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  5. ilori

    ilori Well-Known Member

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    Thankyou for your thoughts - all good points.

    I suppose I was getting at the switch in strategy from an 'asset' to a 'trading' investment - if there is a point at which it makes sense to trade an asset to crystallize capital gain rather than continue to hold for income stream.

    You can buy a share/portfolio/fund with the intention of holding it long term and receiving an income stream - so considered an 'asset'. However if it rises in value quickly (maybe due bear market -> bull market) - need to ask, is it worth holding this asset to receive the income stream, or, has it's value increased so much so quickly, that it is better to sell and take the gain? Need to bear in mind that shares are volatile and at the mercy of sentiment and business performance, so the gains could just as easily disappear.

    There must be a point at which there is a crossover and the capital gain is more important than the income. Example - you may set out to receive a 10%dividend yield from an investment for 10 years - but if there is a 100% capital gain in (say) 3 years - in a way the cap. gain of 3 years is equivalent to the dividend yield of 10 years (ignoring taxes for simplicity). You buy time effectively - take the gain and have 7 years to grow another investment or buy another income stream. Also, regarding certainty - the cap. gain is 100% certain (ie. you sell and take the money off the table), but the dividend stream is less certain (company may reduce/stop div.).

    I'm probably not explaining it very well... but just trying to get a muddled idea out. I'm sure there must be a mathematical way to assess it.

    Thanks again for your input.

    Regards,
    Ilori :)
     
    ilori, 7th Aug, 2008
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  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    I guess the idea you are exploring is that capital gains can happen much more quickly than income would ... eg 10% income pa vs 20 - 30% capital gains pa

    One big problem, as we've seen in recent months, is that capital gains can also disappear just as quick (usually more quickly than they appeared) ... and the big trick is knowing when to sell to maximise your gains. Most people get it wrong ... so much to the point that it is generally suggested that you don't even try!

    If you look at the way the Navra funds work, they do use a mathematical formula to try and capture those gains - they buy when the market goes down and sell when it goes up. They don't try to time it - they just react to what the market does. The results of this exercise are trading profits, which are paid out as income (but in reality they are realised capital gains - it's just that the ATO treats them as ordinary income because it is a trading system).
     
    Simon Hampel, 7th Aug, 2008
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  7. Tropo

    Tropo Well-Known Member

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    “.....You buy time effectively - take the gain and have 7 years to grow another investment or buy another income stream....”


    Good point.

    If you are a passive investor who believes in the myth that the market always goes up, so when you encounter prolonged period of sideways move you’ll experience a serious erosion in the real spending power of your money.
    A market moving sideways for 10 years may not be a big problem, but consider that most people’s long-term investment time span is 10 years.
    Imagine what may happen to your investment (eg..superannuation) if you get no growth from your portfolio for 10 years?.
    Passive investing offers no methodology for coping with such market condition, so should be avoided.
    Practically speaking, all investing is trading (IMHO) and requires an active approach to the market.
    Unfortunately Lady Luck and Mr.Hope will not help you make money during tough times.
     
    Tropo, 7th Aug, 2008
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  8. ilori

    ilori Well-Known Member

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    Thanks again guys, interesting comments... appreciate it...

    To maximise a paper investment (share/portfolio/fund) - perhaps there should always be a trading bias when the opportunity arises for significant capital gain.

    Holding a paper asset for income stream has the advantage that it is low maintenance and provides consistent income regardless of the value of the asset (within reason). However, to not trade it when there is a significant capital gain would be squandering an opportunity – so it seems to me.

    I understand however, that there are people who don't want to be worried about selling (and paying CGT) and are happy to simply hold for the consistent income - that's cool if that's the plan - but surely there opportunities passed up.

    Interestingly - Buffett is in the camp that talks about lifetime assets and favorite holding time of forever - maybe it makes sense for someone like him due to the size of the stake he can take in companies and that fact that it would be difficult for him to trade willy nilly (liquidity issues etc.).

    Currently thinking it makes more sense to hold real estate long term as an asset. Paper investments can be held long-ish term but need to keep an eye of them and continually assess - if strong cap. gain may be advantageous to sell - if significant cap. decline may need to sell to stop loss (being mindful of fact that value of paper investments can fall very far, maybe to zero).

    Thanks again for your input.

    Regards,
    Ilori
     
    ilori, 8th Aug, 2008
    #8