Decision Time: Sell or Hold These Stocks?
My real-money Rising Star portfolio has had great results since I started it up in late 2010.
The crown jewel so far is lululemon athletica (NAS: LULU) . Thanks to continued excellence in efficiency, product design, and grass-roots marketing, both of my positions have doubled. But that's not so unusual. As I detailed in the buy reports, lululemon was a high-risk, high-potential-reward purchase -- and I'm still excited about its future.
But perhaps the most noteworthy performances have come from a couple of my "corporate El Dorados": those dividend-paying large-cap stocks that I bought to anchor my portfolio.
Drugs and sugar water
Coca-Cola (NYS: KO) was my very first purchase, and has an average gain of 20%. Abbott Labs (NYS: ABT) is up about 25%. Johnson & Johnson (NYS: JNJ) has faced some manufacturing difficulties and is up only 2%, which is losing to the market.
This chart doesn't represent my actual gains because of different purchase dates, but is indicative of the companies' performances:
Sell or hold?
Each of my El Dorados helps illustrate one of the key tenets of dividend investing. Let's start with the winners: I've read some arguments for selling Coke and Abbott because their run-ups have brought the stocks to "fair value." Some even questioned my initial buy of Coke because it had already gained 20% in the few months prior.
I've never understood calls for selling stocks -- especially those that were bought for the long term -- after a 20% gain, but I see these arguments all the time. My counter is that I bought these to hold through thick and thin, while reinvesting dividends and collecting more shares along the way.
I've already written that such corporate El Dorados were the greatest performing stocks in Jeremy Siegel's study of the original members of the S&P 500. Altria (NYS: MO) returned an incredible 19.75% annually in Siegel's 46-year study period. Like the other great performers, the then-Philip Morris delivered greater-than-expected earnings growth on a consistent basis. During much of the period, it carried a price-to-earnings ratio slightly above the market average. Sometimes it wasn't cheap on a traditional basis. But throughout the years, it always seemed to deliver a bit more than the market expected.
Abbott Labs was the second-best performer during that time, and Coke is No. 6 on the list.
Those who sold after a decent early gain failed to become the millionaires they could have by holding on. The basic principle at work here is that by holding and reinvesting the dividends, you're purchasing fewer shares when the price is rich, and more shares when the price is cheap. The extra shares act as a return accelerator and rocket total returns higher in good times.
The same principle applies to Johnson & Johnson, whose price has suffered because of some product recalls. With the share price depressed, our reinvestments are buying more shares at better prices. Assuming the company recovers and maintains its decades-long course of excellence, we'll benefit more from accumulating at these lower prices.
I'm holding. For a long time.
As long as I've identified true El Dorados, this process works, and I'm going to stick with it. Thus, I'm holding my anchor stocks, and will even considering buying more J&J while the price is low.
One of the stocks I've mentioned here is among the Fool's favorite dividend payers, as detailed in the special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." It's available free, by clicking here.
At the time this article was published Fool analyst Rex Moore tweets but is not a twerp. He runs a real-money Rising Star portfolio based on his screens. He personally owns shares of Lululemon and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson, lululemon athletica, Coca-Cola, and Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of lululemon athletica, Coca-Cola, and Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.