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By Josh Peters, CFA and Jeremy Glaser | 08-26-2015 04:00 PM

When to Sell a Dividend Stock

Rather than analyzing each holding individually, it makes more sense to ask how your least-favorite holding compares with the best idea on your list of nonholdings, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Josh Peters, the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy, recently made some trades in his Dividend Select portfolio. He's here to share some thoughts about them.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: Can you start by telling us a little bit about your philosophy and how you decide when it's time to execute a trade or when you want to make a move in your portfolios?

Peters: I try to stay fully invested as much of the time as possible. To me, you look at cash as, one, an asset-allocation decision, which is something that is more or less independent of what's going on with individual stocks in your portfolio. You just want cash as part of your general financial plan or security blanket--that kind of thing. Or, two, it's something that you back into because you've sold some stocks that you had to get rid of essentially for defensive reasons--because you just didn't feel like the dividend was safe or you weren't comfortable with the valuation--and you had nothing to replace it with.

So, at times, I have held some cash for that reason. But in my model portfolio, I want to show how I would invest all of the capital that is available for me to work with. Within that framework, it turns into a pretty simple process: Does my least-favorite current holding match up better or worse than my next-best new idea that I don't yet own? I look at valuation, especially our price/fair value ratios, which can indicate that perhaps a stock I own is expensive and I can replace it with something that's cheaper. I look at dividend yields. Those are very important. I typically don't want to sacrifice dividend income in order to make a trade, if I can avoid it. And finally, I look at growth potential. The ideal trade, for me, is to get a higher-quality business at a cheaper price that pays a higher yield and will grow its dividend faster. That kind of opportunity doesn't come along very often; usually you have to give something in order to get something.

[It's better to look] at it in that framework. Rather than thinking in terms of stocks are high or stocks are low or needing to sell this or buy that--making a lot of independent decisions--instead it's better to pair things up. I think that helps you make better decisions for the portfolio and keeps the portfolio on track as a machine, if you will.

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