Since the US presidential election, both US and Canadian stock exchanges have been on a run. It seems that Dow Jones, S&P 500, and TSX indices are making all-time-highs every other day. It has been a wild ride to say the least. If you have been investing for a while, you know that stocks go up and eventually they go down. The other day my brother asked me a question – Should I sell some stocks now and wait for a market correction? His rationale? Since the stock indices are at all-time-highs, he’s thinking about selling some of his stocks now for a profit. He would buy some reverse index ETFs (i.e. SH, SPXU, HXD) to hedge against a down market and buy back when stock prices are lower. If I look at our dividend portfolio, it is sitting at an all-time-high value too. Should I sell some stocks now and wait for a market correction like my brother suggested? Or just keep executing our investing strategy – continue holding stocks and buy dividend growth stocks when they’re on discount? Here are my thoughts on this interesting topic.
- Market timing does not work. If market timing works, why don’t we see any of them on Fortune’s annual richest list? (Pretty sure a smart investor had a similar quote but I can’t find it).
- Many of our holdings have higher yield on cost than what’s available today. Yes, we would make some nice profits if we sell. Since our focus is dividend income, the question is, can we buy back at a price that would result in similar dividend yield? For example, our yield on cost for Waste Management (WM) is well above 5%. At current price, Waste Management has a dividend yield of 2.34%. To get a 5% dividend yield, the price of the stock would have to go below $32.80. That means a drop of more than 50% in today’s price. Is it likely that WM will drop 50% in price? I would argue this is very unlikely. Note: This is the simplistic calculation because you have to compare dividend yields between current holding (original capital, i.e. cost on yield) and new holding (profit + original capital).
- It is impossible to say whether the stock market will continue going up, or we will see a market correction soon. Back in 2010, with the financial crisis still fresh in memory, many people avoided the stock market. They kept waiting for a correction before entering the stock market. If they simply kept their cash and stayed on the sideline, they would have missed the second longest bull market in history.
- Perhaps it makes some sense to sell a small portion of cyclical stocks and reinvest the money somewhere else. For example, it might make sense to sell some oil stocks now price of many oil stocks have recovered.
- Rather than looking at the current stock price and evaluate them purely using PE ratio. We should examine our portfolio holding using parameters like Graham’s Number, Chowder Rule, PEG ratio, and Return on Equity (ROE). Perhaps using these parameters will show that dividend stocks in our portfolio are not overvalued. Note: I have been using Simple Wall St for stock analysis, which I found extremely useful.
- Having recession-proof stocks will limit the impact of a market correction. Stocks like Protector & Gamble, Johnson & Johnson, Unilever, and Coca-Cola should offer some hedging against a market correction.
- A good percentage of our dividend portfolio consists of financial stocks like Canadian banks, insurance companies, and other financial institutions. Canadian banks seem to have a way to make money regardless what the economy is doing. Sure the Canadian housing market is a worry but it appears that many banks have limited their exposures to Canadian housing mortgages. With pending interest rate hikes, insurance companies should benefit (insurance companies buy bonds to protect their investments). Lastly, companies like Visa will continue to make money as long as people use credits. Therefore, I am not at all worried about our exposure to financial stocks.
Should I sell some stocks now and wait for a market correction? I think from points above you can guess that we probably won’t be selling our stocks. If we do sell, it would be more cyclical stocks. For now I’m optimistic on the stock market. I believe the market should continue going up in the near future…but I’m not a market expert so I could be wrong. But if the market goes down, that would provide opportunities to buy stocks at a lower price. Since we are still in the accumulation phase, I would love to see a down market to allow us to add discounted stocks to our dividend portfolio. Last thing I want is buying over-valued stocks. Having said all this, if a janitor or a teacher starts giving me stock picking tips, that’s when I would be worried. If that happens, I would start considering sell more of our dividend stocks.
Dear readers, what do you think? Are you going to sell some stocks now and wait for a stock market correction?