We would love to invest in winners only. But that’s not how real-life investing is like. Sooner or later, it’s inevitable to run into a laggard in your dividend stock portfolio.
Sometimes, laggards provide underperformance but still a positive return. Other times, laggards outright decline over multiple years, standing out like a sore thumb in an otherwise well-performing diversified dividend portfolio.
Here are several ways to deal with laggards. Below, I’ll revisit some of my mistakes as examples to learn from.
I started buying Exco Technologies (TSX:XTC) in 2016. It’s an auto parts and equipment maker, a smaller peer of Magna International (TSX:MG)(NYSE:MGA).
In 2016, I saw a little company with a decent balance sheet that was growing a sustainable dividend at a double-digit rate. I highlighted what I saw in the table below.
In hindsight, 2016 was pretty much the peak of the auto cycle. When the stock continued to increase its dividend at a decent rate in 2017, I continued to add to the stock. However, since then, its dividend has slowed down more and more.
However, I now believe that Exco belongs in the category of dividend stocks that investors should consider buying when its dividend growth is “horrible”. Once again, this year, Exco declared a 5% dividend increase. This is “horrible” in Exco’s terms, which indicates a potentially good time to buy. The related article linked above was written by me at the start of the month with CCL Industries (TSX:CCL.B) and Suncor Energy (TSX:SU)(NYSE:SU) as examples.
Surely, the easy money has been made from the bottom of the pandemic market crash in 2020. However, Exco and Suncor can still deliver outsized returns over the next three to five years because the economic turnaround is perceived to be just getting started.
Hold and wait
After buying more Exco shares through 2017, I held on to the shares, while watching its dividend growth slowing down. I thought I could hold on.
I stuffed Exco stock in the closet for what felt like a long time. At the back of my mind, I was waiting and hoping that it will recover. However, I finally cut my losses in 2019 — at a 31% loss (after accounting for dividends).
It looked like a brilliant decision as the cyclical stock fell even more during the pandemic market crash to as low as $5 per share.
Cutting losses should be your last resort. Stocks do try to recover. Specifically, the businesses behind each stock want to do well because usually a meaningful portion of the management’s compensation is highly correlated to the business/stock performance. It’s just that sometimes macro/industry environments make it difficult for businesses to do well.
Unfortunately, sometimes we will have laggards in our portfolios. When they appear, don’t make panic decisions. Instead, think it through clearly. Laggards must be dealt with on a case-by-case basis just like other investment decisions of buy or hold.
It could be a good long-term move to buy more of the laggard shares. If not, at least consider holding onto the shares.
In many cases, stocks do recover, but it could take years. Anyway, it’s best not to put money in the stock market if you know you’ll need the money within five years.
Only cut losses as a last resort.
Share Your Thoughts
What’s your process in dealing with laggards? Share below!
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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