New Sell: Caterpillar Inc. (CAT)

As a Dividend Growth Investor I like to buy stocks, hold them, and then simply collect the dividends.

In general I agree with Warren Buffet when he stated that his favorite holding period for a stock is “forever“.

So while I apply this rule for the vast majority of stocks within my portfolio, last week I decided to make an exception.

On January 17 I sold 15 shares of Caterpillar (CAT) for a total of $2,526. 

In this post I go over my main two reasons to ‘break the rule’ and what this means for my forward dividend income.

As can be seen in the chart above, Caterpillar’s stock price has been on an absolute tear in the past five years. Global growth, US corporate tax reform and the promise of a new US infrastructure plan have boosted the stock to around $170.

For comparison: my cost basis on the stock was about $78, meaning I saw a 118% price increase on my original investment.

The company’s Trailing Twelve Month’s P/E ratio is now at a stunning 116.90, as compared to a five year average of 56.

While the stock price has exploded, the company has slowed down it’s dividend growth. Looking at the dividends for the past 10 quarters (bar chart below) it becomes clear that this metric has barely budged.

You could say that recently Caterpillar took the Growth part out of Dividend Growth Investing.

The pay-out ratio (trailing twelve months) is at 217%, which is at nose bleeding levels.

While Caterpillar is still featured on the Dividend Champions, Contenders and Challengers list – boasting 24 years of growing dividends – it’s current valuation and lack of meaningful dividend growth made me decide to take some chips off the table.

I have not sold out of Caterpillar completely and will keep my remaining 15 shares in my portfolio for the foreseeable future.

Given Caterpillar’s annual dividend of $3.12 per share, this sell decreased my forward annual dividend income by $46.80. 

What do you think about Caterpillar right now? Are you selling or buying other dividend growth stocks? Leave a comment/reply to share your thoughts!