Is it Time to Sell Direct Line?

is it time to sell direct line?

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)!

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10 Comments

  1. Hey, a gain is a gain, and if you don’t believe in the business anymore, I’d do the same and recapture the capital and reinvested somewhere else. Goodluck with future buys!

    1. Hey Vivianne, thanks for stopping by.

      It’s not that I don’t believe in the business, otherwise I wouldn’t have considered buying in the future. However, I feel like I should concentrate on my investment criteria a bit more strongly. As I mentioned to UTMT, perhaps I should do any growth trades in a separate account, then it would provide a kind of silo – each type of account could be independently run according to its own criteria… Which is what I do with all my other accounts anyway!

  2. I’m holding my DLG.

    The rocket ship analagy is a good one. I bought DLG on their IPO and thanks mainly to the special dividends, 25% of the total number of shares I hold in the company have come from reinvested dividends. That’s pretty impressive when you consider the IPO was only in late 2012.

    From looking at recent performance I think there are more special dividends on the way as mngt seems to be beating estimates still.

    1. Yes they do seem pretty good… But I just feel like I need to stick more closely to my criteria sometimes. Perhaps I should open a separate account for these more growth related stocks, I might feel more liberated in my purchases then…

      I’m sure you’ll do well with DLG, I do really like insurance company stocks!

      Cheers

  3. Ciao M,
    I am of the same opinion when it comes to “certain moves”. I do not think that being all “pure and hard” on a strategy is a good sign, there are times where other plays come handy and should be carried on even if not in touch with the PF general strategy. I for example have set up a certain number of sell orders if certain stocks go below a certain price. They are non core assets (or “almost core”) and I do not mind not owning them for a while, but I do mind loosing gains that the stock did, so I set these sell orders. Technically it doesn’t fit with the buy and hold strategy, but…

    Anyhow good job on the 10% gain in 3 months!

    ciao ciao

    Stal

    1. Thanks, I really agree with you. It’s important to have a clear strategy which drives you forward towards your goals, but it doesn’t mean we shouldn’t be on the lookout for nearby opportunities that can help boost performance!

      I sort of have the opposite plan to you though – I have alerts set on stocks I don’t own yet. I get a text message and an email when they go below a certain level, so I can potentially pick them up for the right price!

      Cheers

      1. Ciao M,

        Actually I have that too, buy order at certain points (yesterday got PZC @ 300), if I do not have cash lying around I set the alerts like you do 🙂
        The sell orders are really there to prevent some major meltdown like it happened in August, I still have to try out that system to be honest with you… 😛

        1. I just wouldn’t bother selling though, I’d look at the stocks that had a meltdown e.g. RDSB and see if I wanted to buy more. If it’s a good stick you bought, then the crazy market volatility should be advantageous… And it was for me – I did pick up more RDSB and also got Unilever at a bargain price, yay!

          1. Absolutely! I only set the sell orders on stocks that I do not want to keep or I am a bit uncertain of… The stocks that “I can do without” let’s put it this way… (BT, SWK for example). The sell order is set to cover 3 to 5 years of NET dividends, so when I am out I technically get 5 years to come back in the stock at better prices even… Problem is if the stock doesn’t continue its fall, in that case I might loose a chance… Here is where the system needs to be tested… 😛

          2. That sounds sensible. I do that manually with my old legacy stocks that I have left over in small amounts from 8-9 years ago. Once they hit a certain level of profitability, they get sold.

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