Yep, another sale. Gotta do what you gotta do sometimes, right?
I’ve decided to sell all of my 223.792 GE shares, with a loss of $205.89 in annual dividend income. Why? The dividend has been frozen until 2017, and I’m not okay with that.
Rather than rehash in detail what’s been said a thousand times before, I’ll link to some excellent summaries of the situation below. Zero to Zeroes’ thoughts on the company mirror my thinking perfectly. Essentially, why hold on to a company with a stagnant dividend in the hopes of capital appreciation when there are companies that offer both capital appreciation and a rising dividend? Doug Van Cuyk’s SeekingAlpha article brings up an interesting point on how management can’t be trusted in terms of share buybacks or dividend increase forecasts. Here’s two more for other bearish perspectives.
In short, despite the nice dividend, my investment rationale for GE has changed. I bought it as a dividend growth investment, and now management says there’s no dividend growth to be had. And I really don’t trust management to increase it as they say they will, in 2017. Remember the Recession and the way they acted. Since my thesis changed, and GE is no longer a sleep-well-at-night stock, it has to go.
But what did I buy with the proceeds?
– 18 shares of VTI, the Vanguard Total Stock Market ETF. The purchase cost $1,964.88, and adds roughly $9.18 in dividend income (though that amount isn’t constant). Why an ETF? Two reasons:
1) Easy to liquidate – if I ever need cash, it’s much easier to impartially sell an ETF for cash rather than an investment I am bullish on.
2) Diversification – I am starting to realize I will never be able to own all the companies I like. Maybe they fail too many criteria (SCI). Or maybe they don’t clearly fit into my portfolio, despite being good investments (PCP, UTX). Maybe they’re companies like GE or Nucor, companies I owned at one point and still kinda sorta maybe want exposure to deep down, but no longer feel comfortable outright owning. Whatever the reason, this allows me to get exposure to the majority of the market I can’t or won’t own. I view that as a positive, and thus bought.
Since it’s an ETF, and its intended purpose isn’t dividend income, I won’t track it in my standard portfolios.
– 21 shares of PepsiCo (PEP). Price per share was $96.83, for a total cost of $2,041.06. With a quarterly dividend of $0.655 per share, my annual income increased by $55.02. PEP really needs no introduction; it’s one of the most well-known, safest, and highly-respected Dividend Champions money can buy. But if you live under a rock, PEP sells beverages (Tropicana, Aquafina, Pepsi, Gatorade) and snack foods (Lay’s, Tostitos, Quaker Oats) worldwide. Since I’ve never really analyzed the company, I’ll run it through my criteria quickly.
- Pays a dividend: Yes
- Has 5+ years of dividend increases: Yes (43 years)
- Has not frozen dividend for over 8 quarters: Yes
- Has a Chowder number of 10 or more: Yes (10.6)
- Has am EPS payout ratio of less than 70%: Yes (65.96%)
- Pays a dividend monthly or quarterly: Yes (Quarterly; January, March, June, September)
- Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A)
- Has generally increasing earnings over the past 10+ years: Yes
- Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
- Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): No
I think its payout ratio is a bit high, and the valuation isn’t ideal. But PEP is a fantastic company. Dare I say it’s one of the few to buy at any price? Might as well start a position now, and take advantage of that compounding.
– 19 shares of Gilead Sciences (GILD). Price per share was $104.71, for a total cost of $1,996.49. With the newly declared quarterly dividend of $0.43 per share, this purchase will add $32.68 to my annual dividend income. I analyzed the company here, and nothing has changed. The price has been pretty stagnant, and that’s about it. I wanted a growth company for my portfolio, and I loved the free cash flow, as well as the newly-announced dividend. So here we are. I added GILD instead of AAPL or MA, the two other growth stocks on my wishlist, since GILD has the highest projected yield. And since these transactions took place in my ROTH IRA, I wanted to take advantage of the tax savings, no matter how small.
So there you have it! The pinnacle of stability, the hot young upstart, and the catchall! A nice blend of companies and ETFs that I hope will serve me a bit better than GE 
How are you handling GE’s frozen dividend?
Disclosure: Long GILD, PEP, VTI. Company logos belong to their respective companies. My portfolio holdings have been updated appropriately.
10 Comments
Nice trades DD. You’re doing awesome. You know whats best for your portfolio and your journey. I like the companies and ETF you bought. Solid picks. I’m still deciding. We’ll see. You take care my friend. Cheers.
Dividend Hustler recently posted…Buys – April 20 2015
Thank you for the encouragement, and for stopping by! Yeah, we gotta do what’s best for us at the end of the day. I think I’m in the minority for selling at this point, but my investing style, objectives, and priorities are different from others’. In the end, I did what was best for me, and that’s all we can ask for.
I’m holding on to my GE shares. I held on when the dividend was slashed back during the financial crisis. I may be reluctant to add to my holdings going forward but I certainly will not sell. I would have continued to average down my holdings before I sold out. Even with a freeze you at least know where you’ll stand with GE for the next couple of years. Thanks for sharing.
DivHut recently posted…Recent Stock Purchase â April 2015
Thanks for sharing your thoughts. These differences are what make a market, and for interesting discussions. Selling GE was definitely one of my hardest selling decisions ever. The case was solid for both holding and selling, but at the end of the day, I wanted to sleep well at night. Dividend freezes when I wasn’t expecting them or accustomed to them (a la SNA, AXP, or PCP) make me uncomfortable, so sell it was. I wish you the best of luck with GE, and maybe I’ll rejoin you as a shareholder again someday.
Hi there — I noticed you bought an ETF and remembered reading an article by David van Knapp over at Seeking Alpha:
http://seekingalpha.com/article/3081726-why-i-purchased-schwabs-u-s-dividend-equity-etf-as-a-dividend-growth-investment
He considers SCHD to be a good dividend growth stock portfolio proxy.
Thanks for the link! Didn’t catch that article. Don’t think SCHD fits my personal investment objectives, but he makes a good case for it.
Glad to see someone as intelligent as you are agrees with my thoughts, DD! Makes me feel good about myself
This has been said many time before, but I honestly don’t think there was any particularly right or wrong move here. At the end of the day, I doubt that either the keepers or sellers will end up really regretting their decision down the road. GE will probably survive and eventually start growing nicely again, at which point sellers will simply re-initiate a position in the stock if they so wish.
Cheers!
Zero to Zeros recently posted…New Stock Purchase: Apple
Yep yep. Doubt GE is going bust any time soon, and the GE Capital divestiture will help. Just a matter whether you can tolerate a dividend freeze. Many can, I couldn’t. No big deal regardless.
Hi DivDev,
I’m with some of the other commenters here who are holding on to GE for now, but I don’t think these are bad moves–I hold PEP and VTI as well, and GILD is on my shortlist to review as a potential purchase.
The dividend freeze isn’t a huge deal breaker for me–I’m willing to accept a frozen div as long as (a) I don’t think it’s permanent and (b) I think it’s being done with shareholders’ interests in mind (i.e., can’t just be doing it for the management to loot the company).
Either way, good luck with your new shares!
Keep on saving,
Charles
CharlesMakesCents recently posted…Market Earnings Yield and the Tactical Allocation of Funds
Fair enough, as long as the decision works for you
I personally have my doubts on (a). “Permanent” may be a bit strong, but I am not convinced it will last only two years. (b) is more of a concern; one of the SeekingAlpha articles I linked to makes a reasonable argument that Immelt may be conserving cash in order to gain a hefty stock award. I’d rather be safe than sorry is all. All the best!