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