Deciding to sell a stock is a tough decision, especially when you realize your largest loss. While we all perform our due diligence prior to investing to provide assurance we are investing in a strong, dividend growth stock, we assume a certain risk when we decide to purchase shares that conditions may change in the future that could cause the stock value to decline. Myself, and many others investments, shared such an experience over the last couple of months as we decided to divest in one troubled stock. Here is my story about selling my investment in ARCP.
By now, I am sure most dividend investors have read about the troubles that have plagued ARCP over the couple of months. So I’ll quickly summarized the events that have transpired. If you would like a detailed description of each of these events, read Dividend Mantra’s article discussing why he sold his stake in the company. He went into detail about each of the following events and provided me with a lot of information that strongly aided in my decision to sell. Within the last several months, the company announced an accounting scandal, has turned over nearly all of its management team, and saw the resignation of its Chairman/founder. However, the final straw that broke the camels back for me was that the company received an extension to release their revised financial statements and suspend its dividend payment until a further announcement. Once the extension was granted, who knew when the financials would be released, the new dividend would be announced, or even what the company’s dividend would be. While some were willing to wait and see, I was not. At this point, I was invested in a company that has turned over its management team, does not currently have a dividend (even though one will be announced in the future), and does not have a set of published financial statements that reflect the company’s true financial position. This no longer fit my model of investing, which invests in companies that are position to grow their dividend over the long-term. As Dividend Mantra put it, the stock has fundamentally changed, and it was time to go.
While my mind was nearly made up to sell after reading Dividend Mantra’s article, I was still trying to find a reason to hold onto the stock. I kept coming back to the fact that the company has a strong portfolio of assets, which were verified to exist by the new management team, that are capable of producing a strong cash flow going forward. As I continued to contemplate my decision, I spoke with Lanny and he gave me a candid, unbiased feedback about the company. Asking questions such as would you invest in the company now? No. What’s the current state of the company and its dividend? I’m not sure. Are there other values in the market that would be a better fit in a dividend growth portfolio? Yes. Lastly, after Lanny and I discussed those and other questions, we addressed the one final mental hurdle that prevented me from immediately selling the stock. At the time of the sale, ARCP accounted for $187 of annual forward dividend income and paid a monthly dividend. This represented a large portion of my dividend income and I was having a hard time accepting the fact that my forward income would decrease by such a large amount. But as we discussed things further, the state of the company’s dividend became more and more uncertain and I began to doubt my ability to continue to receive the $187 annually going forward. It seemed that I was going to lose a potion of this dividend either from selling the stock or the new management team slashing the payout to shareholders and once this realization set it, I was determined to sell the stock at the next opportunity.
At the time of this decision, the market had already closed. ARCP had a rough day and dropped below $8/share. As I went to sell the stock the next day, ARCP’s share price began to swiftly increase and before I knew it my market value increased 8% in one day. This was the volatility that I no longer wanted, as I could not handle the constant large fluctuations that occurred every time a new piece of news came out. However, to take advantage of the upswing in the stock price, I set a floor slightly below the current price to protect myself from a large drop in the market value and increased this floor as the stock price continued to rise. I set a final sell-by date of 1/2/15, the last date the market was open prior to the supposed release of the company’s revised financial statements (At the time, 1/5/15 was the date that I expected the announcement to occur based on different articles I read). I wanted to sell before the date because of the uncertainty that surrounded the announcement to avoid the subsequent reaction by the market. The news could be great and my holdings could soar or the news could be terrible and my holdings could plummet. Either scenario was as likely to occur as the other, and I definitely did not want to experience the latter scenario. So I figured I would happily take the appreciation the market provided between my decision and sale date, from the high $7/share to my final selling price of $9.22/share, and cut my losses.
In total, I sold my 187 shares of ARCP for $9.22 share, receiving a net cash after fees of $1,668 (The large fees are a story for a different day). I realized a loss of ~$869 (including fees), by far my biggest loss. To say the least, I have learned a lot from this investment. Lessons in life can often be expensive, and this one will sting for a while. But the roller coaster ride is over and I can now focus on putting my new free capital into strong dividend growth stocks that will far exceed the loss recognized in the long run. I cannot wait to begin another round of research and put this cash to work.
I am torn between two strategies for this capital, and I will keep you updated as I make my final decision. I can either use the funds to initiated a new stock in my portfolio. As we know, there are plenty of discounts available in the market as oil continues to fall. BBL, one of Lanny’s recent purchases, continues to fall and it would add a new industry to my portfolio. Or I could invest in a stock that is less exposed to oil but has declined in market value due to the broader marker (A stock such as MMM comes to mind, as the stock is always on my radar and announced a very large increase recently). The reason this option is enticing is because $1,668 in capital is an ideal initial position in my portfolio. Ideally, when I have the funds available, I like to invest at least $1,500 in a new position. My second option is to divide the funds up and “re-up” several positions in my portfolio that are below my ideal purchase amount. For example, I recently initiated a position in IBM and CM for approximately $500 each. Way below my ideal purchase of $1,500. I could divide capital in half, add $834 to each position, and increase the cost basis to be in line with my ideal purchase amount. Either option would be great, I just have to see what the market gives me. Regardless, I cannot wait to deploy the capital and turn this negative experience into a positive!
In the end, I took a necessary step back for my portfolio and my forward dividend income. Forfeiting dividend income sucks and it was a terrible feeling when I removed the stock from my spreadsheet. However, I know I made the right move for my long-term financial health. The important thing is that I learned some valuable lessons that I will be able to carry forward for the rest of my investing career. After all, what was the point of this experience if I make the same mistake again? Thank you all for listening to my story. It has been a hectic month, and I am glad to be on a stable ground after the sale.
Bert
Bert, I went through the same thought process the end of last month and made the same conclusion. I think in the long-run we will be much better off. As I explained in my post about it, the external management, activist investor involvement, and the suspended dividend were the primary things that pushed me over the edge on selling. I know I’m happier having put this behind me.
W2R,
Haven’t the last couple of days have been great since I sold my stake. I could no longer tolerate the roller coaster ride that came with the issues you just mentioned. I couldn’t agree more, we will be in a much better place not just because of the fact that we invested in stronger companies, but also the fact that we have learned a lot from this investment and will have new lessons/knowledge to apply to every subsequent investment. To me, the knowledge I gained is much greater than the loss we incurred and the dividend income that we forfeited.
I’m glad this one is behind us. I am excited to read about your subsequent investments of the funds. As always, thanks for stopping by!
Bert
I think you made the right decision in selling ARCP. There are just too many uncertainties with this company, especially now they’ve suspended dividend until they sort out the accounting mess. It’s better to just leave this messy situation and invest in a solid company instead. You will be happier in the long run. I wouldn’t be too worried about the loss of dividend income. You’ll make that amount back very quickly.
Tawcan,
Thank you very much. The piece of mind that I have gained over the last week is pretty valuable haha The dividend was the hardest part for me to accept, and I finally cleared that hurdle right before I sold my stake. I agree with you though, this was a situation where the best move was just to wipe your hands clean of the whole situation. The results of the audit have not been announced yet, and who knows what the results of that will be. It is better to take our capital and invest it stronger dividend growth companies, and as you mentioned, we will be much happier in the long run as a result. I know after this I will place a lot more reliance on dividend history, that’s for certain.
Enjoy your weekend. Thanks for stopping by.
Bert
Lanny,
I probably am not too far behind you. I was hoping to get some clarity on the future dividend plans, but I will probably sell fairly soon. I’ll be interested to see what your investment plans going forward look like.
MDP
MDP,
I hope they arrive at a decision soon to aid investors like you that are waiting for the announcement. I thought this was supposed to be announced at the beginning of the week, which is why I was so stubborn about selling on January 2nd. However, it appears I was wrong to assume such a deadline. I am excited to get a fresh start with the formerly invested capital and find new pieces to add to the portfolio. After all, finding gems and diamonds in the rough is the most exciting part of this process, right?
Thanks for stopping by. I am interested to see how your ARCP story unfolds. Make sure to keep us posted.
Bert
You lost less than a grand, and that is going to leave a sting you will remember for a while? Right now I’m rubbing my index finger along my thumb and playing the world’s smallest violin for your catastrophic loss.
You owned a small fraction of the number of shares I am still holding. I understood your reason to sell when the divy was suspended, as similar thoughts crossed my mind, up until some whales jumped into ARCP and took a major stake days following the divy news. For you to bail regardless following that development shows lack of balls.
Furthermore, I’m afraid this lesson is not over for you, as it’s really going to sting in a few months when you realize you would have broken even – if not made a profit – had you held on for the ride and manned up.
My sincerest condolences to you for your loss.
NoCojones,
First, I think there is a difference in perspective here. What is a drop in the bucket to you may be a large loss to others. I believe each person’s financial situation should be considered on an individual basis. For me, ARCP was one of my largest individual stock holdings (~6% of my portfolio’s cost basis) that accounted for ~10% of my annual dividend income. In my current financial situation, I would consider that a large loss. So while $869 may be throw away money for you, it definitely is not for me.
I am curious why you are so certain that the investment of an activist investor suddenly indicates the stock is going to appreciate. Sure, there are plenty of success stories where activists double investments after revealing their stake. But with gains also come losses, and nobody has a perfect record. For fun, I google’d “Activist Shareholder Losses” and the first result produced an article titled “Bill Ackman’s Hits and Misses” and the article went on to detail how some of his public knowledge stakes performed over the last several years. For every genius investment he made, there were duds (JCP, Herbalife, and Borders). Even Warren Buffet has some misses. So I think the assumption that an activist shareholders investment automatically results in price appreciation is incorrect based history and I would be careful basing an investment decision solely on that fact. I know I am not comfortable investing in a company just for that reason.
Lastly, you are mistaken about one thing in your comment. The lesson is over and my book on ARCP is closed. Regardless of what happens, I won’t care because I was no longer comfortable investing my money in this company. Instead of living day to day with this investment and navigating through the ensuing uncertainty, I will happily invest my money elsewhere in other dividend paying stocks. For me, it is all about investing in companies that will produce a steady, growing dividend. At the time I invested in ARCP, I thought this was the kind of company I was purchasing. At the time of my sale, that was no longer the case and the company no longer fit my investing profile. It is okay, it happens. But most importantly, it is over and I have moved on.
Lessons learned, on to the next investment. Best of luck with your ARCP investment. For your sake, I hope it increases. But at this moment, who knows.
Bert,
It’s a tough call, but I think you’re better off. ARCP could very well turn it around, but it’s a total speculation either way. And that’s just not something that a conservative, income-oriented investor is looking for, especially since they’ve eliminated/postponed the dividend. I’m confident that, regardless of what happens here, you’ll be glad that you moved on to higher-quality equity.
Can’t foresee an accounting scandal/loss of management/dividend elimination/credit downgrade.
Bigger and better fish to fry! 🙂
Best regards.
DM,
I agree. Your article spelled it out perfectly and was a major influence on my decision to sell. As you pointed out, it just wasn’t the same company that we thought we were initially investing into. We are not in the game to invest in speculation companies, so why start now? Business is business, and I have moved on and I am ready to take on the next challenge of finding the best way to re-allocate this cash pile I am suddenly sitting on!
Thanks again for your help and stopping by!
Bert
I agree, you made the right decision in my opinion. It’s tough to sell a stock when we think about ‘what we’re losing’ but from another perspective, you can invest that money from the sale in a much more solid company, that isn’t facing problems. There are plenty of bargains out there right now, especially in the UK stock market. Our yields tend to be slightly higher than the US and the $ is high against the £ right now.
The important thing is that your money works for you and doesn’t waste time sitting on its ass!
Cheers
Bert,
You made a tough decision, but definitely the right one; when a position is causing you anxiety, it has to go. As DGIs we are investors, not gamblers/speculators. Don’t be too hard on yourself since something like this is all but impossible to foresee without behind-the-scenes information.
Put the capital to work in quality companies and chalk this one up as an experience.
– Ryan from GRB
Hi Bert,
I think you did the right thing and putting the capital back to work will hopefully result in higher income & gains for you than continuing to hold an uncertain position in ARCP.
There’s really no accounting for fraud, it’s even caught Warren Buffet out with his Tesco investment. Stocks are a risky asset class for a reason and even dividend champions such as Bank of America have cut dividends (from $0.32 to $0.01 in 2009 after a 30 year growth period).
You mentioned about lessons learned in your post – what do you think you’ll change going forward to mitigate the impact of something like this happening again? I think diversification is the main answer here (and one reason why index funds tend to do well over the long term).
Best wishes,
-DL
DL,
Thanks for stopping by and your thoughts. At the end of the day, we are forced to rely on the financial statements produced by management. There is an inherent risk in the investing process that we accept when we decide to invest in a company due to this fact. And as you pointed out with BAC, there is also the risk that a company can slash a dividend at any given moment since dividends are not guaranteed. We do our best to find and invest in companies that are the most likely to pay a dividend stream, but it is definitely not guaranteed.
I think my biggest changes that I will make to my investment strategy are that I will take a closer look at the management team and place more emphasis on a company with a longer track record of paying a dividend (even with the risks discussed earlier). If I would have dug deeper into ARCP’s management team, I would have learned about Schorsch’s previous REIT history, which have deterred me from the investment (But who knows). And for Dividend history, I want to focus on companies that have a long, proven track record of paying a dividend. ARCP has only been public for a few years, and while the dividend is great, we really couldn’t understand management’s long term plan for the dividend because they haven’t had the history to prove they could consistently pay a high dividend for an extended period. If I would have implemented those two pieces into my investment decision, I would have like to think that I would have chose to invest in O over ARCP.
Thanks again for stopping by. I hope this provides a little more insight into my decision to sell!
Bert
I got out somewhat lucky with ARCP. Originally bought at $11.25 bought more at $8.20 then dumped them at $9.50.
I was going to hold it but I had flashbacks to when I bought NG at $12.50 on Jim Cramer’s advice right before it plunged to $4. I guess it’s a good lesson to learn at the beginning of my investing career rather than the middle.
I don’t know… it seems like it’ll take even the best stock 5 or 6 years to make up your losses with their dividends. Perhaps you should go with a broker or a CD if investing stresses you out so much. I look at ARCP as not having anywhere to go but up at this point. I dont believe its realistic to believe that they will fail as a company, given their assets. The benefit of good new far outweighs any likely bad news that was coming. ARCP was paying dividends at about 10%, so if you go to a ‘safe’ investment, you might get what, 3%? honestly, I think you should stick to savings accounts or CDs after hearing how stressed you get with volatility… good luck to you with your investments!
$$$
Thanks for stopping by and the comments. I don’t necessarily agree with your statement that ARCP has nowhere to go but up. Who knows where the floor or the ceiling for the stock actually is. There is still plenty of room for the company’s price to decline.
It is not that I get stressed out about investing at all. in fact, I have many stocks that have not been performing well for me since my initial investment and I have no plans on selling the stocks (BP, GSK, CM). However, the key difference between those stocks and ARCP is the fact that ARCP’s management team turned over, they still don’t have a published set of reliable financial statements, their Cole Capital sale fell through, and they suspended their dividend. I am not a spec investor, I am a dividend growth investor. The stock had fundamentally changed and it no longer fit my investing model.
Best of luck to you as well.
Bert
$$$,
This is Lanny, the other Diplomat, and I’m curious – just a mere hypothetical situation. If you were a dividend income investor and I told you that management had committed fraud, financial statements are more than likely misstated for multiple periods and I’m no longer going to provide dividend income to you simply because we do not have true earnings or they are going to be burdened some due to reputation we have now lost – would you hand me $5K and invest into me?
Also $$$, we do not generate 3% returns on safe investments. Our dividend yields are closer to 4% on companies that are fundamentally sound. Further, dividend growth rates on average are 6-8% on this, as well as appreciation to the stock that – hey – may be 3-5%. Add all of this together and guess what? You have not only a great dividend income producing & increasing stock, but also an appreciating one.
I more of come in on this conversation to start a little Q and A, is all, to possibly understand other types of investors stand points and hopefully you can share some of your financial knowledge based on your investing strategy.
Thanks $$$, hope to hear back soon.
-Lanny
The OP had a lot of money invested… to me it seems a bit early to jump ship, especially when the stock has been rebounding. Yes, we did not know what the new dividends would yield, but I would rather sit around and potentially lose a few extra dollars, then jump ship and lose $800. If OP invested his remaining money from ARCP at a rate of 4%, it would take him approximately 6 years of dividends to earn his money back. I’m just saying, is it worth losing 6 years of of investment life, or is it better to ride the storm? Let me know if you see a problem with my math 🙂
It’s true that we do not know the new management team, but does anyone ever know the management team??? If so, we would have seen these issues coming and would have avoided all the issues with Enron, etc.
To each their own though. I purchase ARCP at $8.17 and it’s done what i’ve expected so far. Hopefully it’ll continue to climb and even if dividends are set to the industry standard… i’ll still be making 4% or so. I also purchased my stock for this particular company through computershare so that i could avoid the initial fees.
A lot of you have far more experience investing than I do, but this is just my two cents. Obviously if there was a right or wrong answer and we knew it, we’d be on our yachts in the tropics instead of posting on this forum. 😉 Good luck to everyone on this forum!!!
Thanks for sharing your recent sale of ARCP with us. I find it fascinating how the tide has quickly turned on this company in just the last couple of weeks. When news first broke a while back about the fraud every post I read among the dividend bloggers was how they all planned to keep and some even add to their ARCP position. Now it seems that selling has taken over for this stock. The bottom line is that if you aren’t happy with any holding for whatever reason then sell and put that money to work elsewhere. To me, I really get the sense of a herd mentality among many of the dividend bloggers though. Just my observation. No only picks winners and I commend you for at least making the decision to move on and not look in the rear view mirror.
Thanks DivHut,
It has been a crazy couple of months for ARCP. For a period of time, it seemed like negative news about the company was coming out every week. With each successive announcement, the dividend picture became fuzzier and fuzzier, which snowballed the selling in the dividend growth community in my opinion. I agree with your assessment about the herd mentality, and I definitely think that was present for this stock. I think all dividend growth websites have published a “Recent Sell – ARCP” article over the last month haha
I agree, if a stock no longer fits your investing model, whether it is PG, KO/PEP, XOM, ARCP, etc., just cut your ties and move on. The key is keep allocating your money in stocks that fit YOUR profile! ARCP have evolved from a dividend growth stock to a spec stock over the last few months, and I no longer wanted a part of that . Obviously some of the other commentors enjoy spec stocks, which is fine because that is their strategy. It just isn’t mine.
Thanks for stopping by and commenting. Enjoy your Sunday!
Bert
Wish you the best with the next one. My question to every person I’ve read who bought ARCP: did you look at the Free Cash Flow (you can find it at Morningstar.com under Key Ratios). This is a very good indicator – they’ve never had any positive FCF – ever. Also, never any positive Return on Equity. These are basic indicators of companies bound to break your heart and your bank account… (by the way, look at WDR – from all the indicators I follow this is a wonderful company with terrific numbers. Just increased the dividend 27%, little debt, great growth – just my 2 cents). Thanks.