Is it Time to Sell Direct Line?

I bought Direct Line Insurance (LON:DLG) in June – not that long ago. However, it was a purchase that didn’t actually fit in with our value investing criteria. ‘So why did I buy it?’ you may ask, and rightly so. Well, it was a blatant special dividend capturing purchase. DLG had announced a special dividend and on top of the regular dividend, it looked like an attractive offer. The price was fairly cheap, so I decided to purchase the stock, capture the upcoming dividends, and decide later on whether it was worth keeping or not.

I came to reviewing this stock recently and decided that I wanted to put my money elsewhere for the main reason that DLG doesn’t fit in with our value investing criteria – and it will not meet those criteria for a while. Is it time to sell Direct Line? – yes. Now, even though we overwhelmingly focus on value investing for most of our purchases, we also own other types of stocks and investments e.g. growth stocks and funds. But DLG doesn’t fit into those either… although some might consider it a growth stock.

I don’t think it’s wrong to be flexible and look outside your main criteria for investing from time to time. Jason from Dividend Mantra wrote about the 3-stage ‘rocket ship’ of investing criteria:

1. Buying high yield stocks that are low/no growth – these will get the dividend income rolling in and get your portfolio off to a good start – it gets that rocket ship off the ground so to speak e.g. National Grid;
2. Medium yield, medium growth – these would be the core of your portfolio and keep ticking things along, hopefully year in year out e.g. Diageo;
3. Low yield, high growth – these stocks offer the potential for higher growth of the dividend in the future e.g. ARM Holdings.

So the purchase of DLG sort of fitted into the first stage of the rocket ship – it was a high yield capture. However, even though some companies declare regular special dividends, it’s not guaranteed that they will keep doing so. Of course, companies who don’t do special dividends don’t guarantee their regular dividends, but the point is special dividends are just that – special. They might not ever happen again. So I’d rather put my money into a company that had solid credentials and a regular dividend that was either high yield or one that was likely to keep growing, or both! For example, GlaxoSmithKline (LON:GSK) or National Grid (NG.) are high yield shares, but they’re not really likely to grow at the moment, however they are quite stable in their dividend. Dividend growth stocks might include stocks such as Interserve (LON:IRSV) or Bloomsbury Publishing (LON:BMY).

I sold DLG in October for a total profit of 10.9% – and I’m pretty happy with that. It might seem low to some people, but it was a decent amount in £££, and I’m not a trader looking for big % returns in short timeframes – I would much prefer to buy and hold forever, collecting the dividends along the way. I’ll let you know what I did with the money in my next post, so stay tuned to the TV (sorry, I couldn’t resist!), and don’t forget to subscribe via email (no spam, no bombarding your inbox, just a monthly summary of what’s been happening on the site, along with the very occasional special newsletter written by M)!