Q&ACategory: Dividend StocksEntry and Exit Price Question (for optimizing a current portfolio)
Christopher Ong asked 4 months ago
Hi, After the webinar (and referring to the online learning materials too) regarding entry and exit price, I would like your take on how the following situation can be dealt with (to help optimize the portfolio): If I am current holding units of starhub (average buy price $1.70), and would eventually like to sell off the position to reinvest the capital into a better company are there any other considerations to take into account when determining the exit price (i know that in the course we are taught that typically a good exit price is one where your dividend yield is close to the all-time low).  I know you guys said that should not buy SG Telcos cos of market competitors etc, but this was bought before I signed up for Dividend Machines lol. In this case for a company like starhub, my buy price was obviously much higher than what the current market price is right now, meaning that selling the shares in the company would result in a loss (even after accounting for dividends collected from the company). I have thought of 3 possible courses of action (and their related outcomes) but I not sure whether the pros and cons of each have been comprehensively considered. So here are the options I am considering:  
  1. Sell (at a loss) and take the money to reinvest into good companies (using the Dividends Machines methodology of course). Obviously in this case a paper loss will turn into a real loss, but at the same time, if the capital is reinvested into a much better company, that could more than cover the losses generated from selling.
  2. Hold (and continue to just take dividends), thereby not turning a paper loss into an actual loss. The downside to this is of course the opportunity cost of not taking that money to reinvest into better companies. 
  3. Hold (and take dividends) until the total gains from dividends and capital gains (from share price increases) result in breaking even, then sell the shares to reinvest. This also is a case of opportunity cost (but is it higher or lower opportunity cost than situation 2?) 
Obviously in situations 2 and 3 there is a sense of loss aversion, but at what (opportunity) cost? I'm aware that its not possible for you to tell me what exactly I should do in this case, but I would like to understand the thought process in how to deal with such a situation.  
1 Answers
Rusmin Ang Staff answered 4 months ago
Hi Christopher, I think you laid out the options for yourself pretty well. I would usually go for option 1 once I realised the company is hopeless or their fundamentals are eroding slowly. Oftentimes, we hope for the company to come back in share price then we will sell but market doesn't look at it that way. I have seen many lousy companies with their share price trending down. Not only it is an opportunity cost but also the loss got widen over time. Starhub used to be a good dividend stocks until they introduce competition which benefited consumer but whether the dust has settled down, I'm not sure as I haven't been following them since 2015. So you need to assess the likelihood of Starhub whether they can continue paying the same or more dividend. Else, make sense to sell and move on.
Christopher Ong replied 4 months ago

Hi Rusmin,

Yeah as writing this out to you guys that actually option 1 would be the obvious option.

But as I’m thinking further then there are 3 other questions (specific to option 1), specifically linked to the idea of WHEN to exit:

Q1. Is it better to sell the company ASAP? This means taking the loss at whatever the price it is right now.

OR

Q2. Is it better to wait if the price will go up (ie. it moves closer to the all-time low dividend yield)? Perhaps setting myself a target price to sell it at (but there’s a danger that price never gets hit and the performance of the company goes downhill meaning i take an even bigger loss)

OR

Q3. Sell AFTER the dividends has been paid out (in May / June). I’m also aware that a dividend payout tends to bring down the share price by a corresponding amount so it shouldn’t really make too much of a difference.

I guess what complicates this decision is that recently Starhub’s share price (and performance as a company) is actually improving compared to previously (e.g. for the longest time it dropped to $1.00-$1.10 but it’s gone up to around $1.15 range more recently. But whether the company can continue to do well is anyone’s guess considering the competition and other factors.

Rusmin Ang Staff replied 4 months ago

I think you may have to read their annual reports, including their competitors like Singtel? Then attend their AGMs to get a sense whether the business outlook is improving or going to get worst? There are some analyst report that you can read up as well. As a customer, we can also look at our bill. Is it getting cheaper? My Starhub mobile bill used to be more than 100, now it is less than 100 which isn’t good for telco.

Q1 Once I concluded it is hopeless, we will just exit at a loss (can be a gain) immediately.

Q2 Unless there is a short-term catalyst, usually the price will just get worst over time. By then, it might be too painful to even sell and most people just leave it there. I think decisive action is far more important. Remember, we don’t have to make back the money the way we lost it. There are better ideas with higher certainty where we can get back our return if the current one is mediocre 🙂

Q3 No difference.