Is It Time to Start Selling Stocks?

After another solid week of performance, the real-money Inflation Protected Income Growth portfolio finished this past Friday up more than $540 since last week's close. That gain gives the portfolio a better than 22.5% total return in the eight months since it was launched. That would have looked extraordinary in an ordinary market, but in this market, it's just about in line with what you would have gotten by buying an S&P 500 tracking fund and taking the dividends as cash.

Regardless of whether those gains were driven by fundamentals or by the market's rapid ascent, after a gain like that, it's only natural to consider whether it's time to start selling. After all, the market can be incredibly volatile, and the same emotions that lift stocks skyward can take them plummeting back to Earth. The IPIG portfolio may have made it this far and achieved those returns without selling a single share of stock, but that track record can't last forever, can it?

When there will be selling
The primary goal of the IPIG portfolio is to attempt to build an income stream that rises faster than inflation. To do so, the portfolio looks to buy shares in companies that have a history of paying and increasing dividends and look capable of continuing to do that. To try to protect the overall income stream from the reality that dividends are not guaranteed payments, the portfolio pays attention to valuation, balance sheet strength, and diversification as well.

A pick can be sold if it no longer looks capable of maintaining or increasing its dividend, if its shares run well beyond what looks like a reasonable valuation, or if its balance sheet becomes over-leveraged. A pick can be sold for several other reasons, too, such as the fact that electricity generator NV Energy (NYSE: NVE) is expected to be bought out for cash early next calendar year.

NV Energy's buyout means it's only a matter of time before those shares are sold. Since the company recently decided to maintain its dividend, there's no pressing need to sell at this time. Indeed, waiting until 2014 will give the IPIG portfolio long-term capital gains treatment on the gain.

Aside from that pending forced sale, a few other picks are being watched closely for being potentially sold. Package delivery giant UPS (UPS 0.14%) is under the microscope because its balance sheet took on significant leverage to help its pension. While the goal of a well-funded pension is admirable, the risk of too much debt can offset the benefits from pension funding.

On a separate note, both Air Products and Chemicals (APD 0.43%) and Kinder Morgan (KMI -0.64%) are funding aggressive expansion plans. If those expansion plans work out, both companies' valuations may increase as a result. But in the meantime, their dividends aren't as well covered by free cash flow as they could be, thanks to the capital expenditures they're making for those expansions. As a result, while success should bring higher valuations, failure may lead to a sale of one or both because of dividend risks.

And then there's defense contractor Raytheon (RTN). The company looked reasonably valued back in February, when it was picked for the IPIG portfolio, but its shares have been gaining incredibly since then, largely because of its own successes. Its recent market cap of around $24.6 billion is nearly 31% above the $18.8 billion fair-value estimate from that original pick.

That's a sign that the original fair value estimate needs to be reviewed in light of the company's new news since then. If the original fair value estimate holds steady, then Raytheon may be a candidate for selling base on valuation.

Nothing lasts forever. Until then, enjoy the ride.
As wonderful as it would be to just find great companies, buy their shares, and hold on forever, the reality is that there are reasons to sell, just as there are reasons to buy. Thanks to its consistent set of principles to guide its buys and sells, the IPIG portfolio stands a decent chance of meeting its objective of providing a rising income stream. Nothing in the future is guaranteed, of course, but here's how the portfolio stands as of the market's close on Aug. 2:

Data from the IPIG portfolio's brokerage account, as of Aug. 2, 2013.

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