Last week, I showed you how I make one of the most difficult choices an income investor will ever face: when to sell a stock to lock in a profit.

Today, I’ll cover the only decision that’s even harder. I’m of course talking about when to give up on a stock, let go, and sell it at a loss…

New Dividend Hunter subscribers often ask about my criteria for selling a stock. Most are looking for some percentage loss or gain on a stock as a trigger to sell. I stay away from any rules not based on the underlying fundamentals of each recommended investment.

Over the years, I have found that the annual portfolio turnover for the Dividend Hunter portfolio averages about 25%. To me, with a buy-and-hold investment strategy, that number seems high, but it is surprising how the investment outlook for companies can change. Over eight years of Dividend Hunter investing, there has been about an equal 50/50 split between stocks sold for a profit and those on which we took a loss.

The reasons to sell fall into three distinct categories. I will cover each reason in a separate article. Today, in the third installment of this series, I’ll cover when to sell a stock at a loss.

I am frequently asked what amount of decline would trigger a sale. Many investors come from other strategies that tell them to sell after a 20% (or similar amount) decline to protect against further losses.

With a focus on investing to generate a high-yield cash income stream, a falling share price is not usually a good reason to sell. As long as the company continues to pay its regular dividends, a lower share price should be viewed as an opportunity to add shares to boost your average yield and income. A falling share price does not indicate that the dividend will be cut—at least most of the time.

Instead of basing decisions on share price, it’s an actual threat to the dividend payment that will trigger a sell recommendation. Occasionally, you can see a dividend cut coming, such as when a company’s profits decline and fall to the point where it earns less than the dividends it pays to investors. At that point, it’s a judgment call whether the business can recover; if it can’t, the dividend will soon be reduced. I will usually take the conservative path and recommend selling.

A dividend cut or suspension will almost always trigger a sale. These often come as a surprise, or the result of an unexpected event. The pandemic-triggered shutdown pushed a lot of companies to stop paying dividends. When that happens, the best course will be to sell and take the loss on the shares.

Fortunately, surprise dividend cuts are rare with a well-researched high-yield portfolio (such as the Dividend Hunter portfolio).

The bottom line is that a decision to sell a stock, especially when the share price is down, should be based on the fundamentals of the company’s business. If the profits stay predictable and the dividend is secure, a lower price is an opportunity to buy. If the fundamentals erode, that would be a reason to sell the shares.

One example that is not apparent concerns the exchange-traded notes (ETNs) offered by Credit Suisse Group AG (CS). Here are three popular funds:

• Credit Suisse Silver Shares Covered Call ETN (SLVO)
• Credit Suisse Gold Shares Covered Call ETN (GLDI)
• Credit Suisse Crude Oil Shares Covered Call ETN (USOI)

The ETNs provide investment exposure to the designated commodities and pay attractive dividends. The problem is that an ETN is an unsecured debt obligation of the sponsor. Credit Suisse faces major business operations threats, making these funds too risky.