Stock in Roth - sell at loss or keep for dividends?

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CenTexan
Posts: 432
Joined: Wed Jun 07, 2017 8:02 pm

Stock in Roth - sell at loss or keep for dividends?

Post by CenTexan »

The other day, my brother-in-law asked my investment opinion ( :shock: ) on a stock sale he was contemplating.

He bought $14k worth of a certain stock in 2016 in his Roth account. It is now worth about $5k. He asked whether I thought he should sell it or keep it for the dividends. Since I was in a similar situation a few years back and sold and switched to indexed funds. I told him that I had sold mine and moved on. But he made the following points:

1. The equity has been paying a consistent dividend of around 7-8% a year and if he calculated the dividends he has been receiving against the original investment amount, his shares are earning about 2.5% a year.
2. He "hopes" the value of the stock will recover in coming years.
3, He doesn't know where he would reinvest the $s if he sold it.

I cautiously said I would sell it and buy something akin to VYM (Vanguard High Dividend Yield Index Fund ETF Shares; paying 2.79%) or SCHD (Schwab U.S. Dividend Equity ETF; paying 2.89%) and not have to worry about whether or not his individual stock ever regains value ("but I understand his concern.") Take your lumps and move on, like I did (well - I didn't quite say it like that, but you get the idea).

Was I correct in my advice? Would you sell the shares and "lock in" the loss to move to indexed?
Chuckles960
Posts: 917
Joined: Thu May 13, 2021 12:09 pm

Re: Stock in Roth - sell at loss or keep for dividends?

Post by Chuckles960 »

The money has been lost whether he "locks it in" or not. The position that "it's not a real loss if I don't sell it" is not rational. For any investment, every day that you hold the stock is the same as if you are selling the stock and buying it back at the same price. If you definitely would not buy it back, you should not be holding it.

PS The dividend is also not relevant by itself. The only thing that counts is the total gain or loss. But loosely speaking, companies pay dividends because they can't use the money to expand the business, i.e. it's not a growth stock. So it probably won't go up a whole lot, although of course I can't really tell

PPS In a Roth, you don't even get to harvest a loss for tax purposes.
Last edited by Chuckles960 on Mon Jul 26, 2021 11:53 am, edited 1 time in total.
chrisdds98
Posts: 497
Joined: Tue May 19, 2015 9:55 pm
Location: Austin, TX

Re: Stock in Roth - sell at loss or keep for dividends?

Post by chrisdds98 »

CenTexan wrote: Mon Jul 26, 2021 10:47 am The other day, my brother-in-law asked my investment opinion ( :shock: ) on a stock sale he was contemplating.

He bought $14k worth of a certain stock in 2016 in his Roth account. It is now worth about $5k. He asked whether I thought he should sell it or keep it for the dividends. Since I was in a similar situation a few years back and sold and switched to indexed funds. I told him that I had sold mine and moved on. But he made the following points:

1. The equity has been paying a consistent dividend of around 7-8% a year and if he calculated the dividends he has been receiving against the original investment amount, his shares are earning about 2.5% a year.
2. He "hopes" the value of the stock will recover in coming years.
3, He doesn't know where he would reinvest the $s if he sold it.

I cautiously said I would sell it and buy something akin to VYM (Vanguard High Dividend Yield Index Fund ETF Shares; paying 2.79%) or SCHD (Schwab U.S. Dividend Equity ETF; paying 2.89%) and not have to worry about whether or not his individual stock ever regains value ("but I understand his concern.") Take your lumps and move on, like I did (well - I didn't quite say it like that, but you get the idea).

Was I correct in my advice? Would you sell the shares and "lock in" the loss to move to indexed?
total return is more important than dividends. If I were him I would sell and invest in VTI or VT
investuntilimrich
Posts: 226
Joined: Thu Jan 21, 2021 1:33 pm

Re: Stock in Roth - sell at loss or keep for dividends?

Post by investuntilimrich »

Probably better not to think about what he paid for it. You don't want to make a second bad decision based on a first one.

So taking the cost off the table, does he believe the stock is going up or down and why? What problem did they solve that will allow the company to now move in a positive direction? Were they affected by a recent shutdown or has this drawn out over a long period of time?

Basically if he wouldn't pay 5k for it today, he probably shouldn't keep it for 5k either.
Doctor Rhythm
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Joined: Mon Jan 22, 2018 2:55 am

Re: Stock in Roth - sell at loss or keep for dividends?

Post by Doctor Rhythm »

Where is he currently investing the dividends from this high-dividend stock? Presumably, he feels that this alternative is preferable to the high-dividend stock (otherwise, he would reinvest those dividends back into the company). Thus, assuming he’s not going to become an index investor, that alternative would be a reasonable place to invest the proceeds from the sale of his high-dividend stock.

Not that this is anything close to ideal or Boglehead approved. It’s more just a matter of internal consistency. But, yes, sell and move on and don’t look back.
terran
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Joined: Sat Jan 10, 2015 9:50 pm

Re: Stock in Roth - sell at loss or keep for dividends?

Post by terran »

If he had $5k in cash sitting in his Roth IRA right now, what would he do with it? Especially in an IRA where there are no tax repercussions, choosing not to sell an investment is exactly the same as choosing to buy it, so if he would do anything other than buy this stock right now with $5k cash then continuing to hold it is the result of a cognitive bias that is clouding his judgement.
Boglegrappler
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Joined: Wed Aug 01, 2012 9:24 am

Re: Stock in Roth - sell at loss or keep for dividends?

Post by Boglegrappler »

Anyone owning or buying a stock that currently is yielding in the ballpark you're talking about should be aware that either the dividend is at risk of being cut, or that the dividend is likely to decline over time as there is very little growth in the business, or likely some combination of the two.

That's what the market is telling you when it pays 12 or 13 times the dividend for a stock. The market could be wrong, but you should understand that's the bet you're making when you decided to hold it for a recovery.
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