Knowing when to sell a stock can be as important as knowing when to buy it. This can be especially difficult with dividend stocks. Investors are told to hold onto their dividend stocks to allow the benefit of compounding to work its magic. But in any market, there are dividend stocks to avoid. And in this sideways market, that remains true.
One factor you can use to determine which dividend stocks to sell is the level of insider selling. This isn’t a perfect measurement, insiders sell stock for a variety of reasons.
If selling activity isn’t being offset by insider buying, though, it may suggest that a stock is overvalued. This can frequently be confirmed by other fundamental metrics.
Remember, selling a stock doesn’t always mean saying goodbye to a stock forever. It doesn’t even mean unloading your entire position. Although in some cases, for example, if the dividend itself is in jeopardy, it may be time to walk away.
With that as a background, here are three dividend stocks to avoid at this time.
3M (MMM)
In late June, 3M (NYSE:MMM) announced it reached a settlement in its “forever chemical” lawsuit.
This will have the company paying $12.5 billion in future years. After an initial pop on the news, MMM stock is drifting lower again.
One problem is that this isn’t the only lawsuit bedeviling the company. It still has to resolve its lawsuit regarding its earplugs. So in addition to the $2 to $3 million in annual damages analysts are accounting for now, there are likely more unknown damages to come.
In time, this may turn out to be bullish for MMM stock. The known is worse than the unknown so now analysts and investors can start to sharpen their pencils and re-evaluate the stock.
In the last quarter, institutional investors sold nearly as much stock as it bought. It’s likely that selling will continue in subsequent quarters.
One thing those analysts are considering is when, or if, these payments over the next few years will impact the company’s dividend.
The company has the coveted dividend king status and when a dividend king fails (which simply means it ends its streak), it’s almost always time to sell. The chance that MMM will do that still seems remote, but the risk is not zero.
Eli Lilly (LLY)
Eli Lilly (NYSE:LLY) has been one of the best-performing stocks in 2023. LLY stock is behaving like a tech stock posting a 26% gain as of June 27, 2023.
The gain is even bigger if you bought the stock at the beginning of March when it was trading closer to its 52-week low.
The stock’s surge is due to two of the company’s pipeline candidates that are undergoing regulatory approval. One is for diabetes and potentially could be used to treat obesity. The other one is for Alzheimer’s disease.
It’s easy to see why any drug that can help in the treatment of these diseases would be cheered by investors.
But LLY stock now trades with a forward P/E ratio of over 52x. That coincides with the stock trading near its 52-week high and the significant insider selling in the last quarter.
It’s true that insiders may sell for a variety of reasons, but when it comes at a time when the stock is objectively overvalued, it’s usually a good sign that more selling is on the way.
Oracle (ORCL)
Artificial intelligence (AI) will be an investable theme for years to come. Putting Oracle (NYSE:ORCL) on this list of dividend stocks to avoid doesn’t contradict that statement.
Rather, it should remind investors that stocks don’t move in the same direction all the time. And right now, ORCL stock looks like a reversal could be ready to happen.
The company is a leader in generative AI. That along with its cloud services will be catalysts for the stock going forward. But the stock is trading near its 52-week high and insider selling is up in the last quarter.
Once again, I understand that insiders sell for a variety of reasons. But insiders only buy for one reason – a belief that the stock is undervalued. Oracle insiders aren’t suggesting the stock is undervalued and neither should you.
If you currently own the stock, it may be time to book some profits and look for a better entry point to buy a stock that should be a strong performer for years to come.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.