Honing In On Bond Funds And Sell Stops

Ulli Uncategorized 7 Comments

Using sell stops with dividend paying bond funds works the same as with any other equity mutual fund/ETF. Reader Joe had this to say:

My question today deals with setting stops on junk bond and short term bond funds.

A large element of their performance is their dividend, which may be 6 or 7%. How do you account for dividends in setting stops on these types of funds?

For example, if the highest price in the period I’ve held the fund is $10.00, with a 7% stop, it looks like I should sell the fund when it hits 9.30. However, with the dividends going to purchase additional shares, in dollar terms I may be “down” only 4.5 or 5% with the price at 9.30.

Any thoughts on this?

As I mentioned before, whenever a fund/ETF distribution occurs, you need to reduce the high price of your sell stop by the amount of the dividend. As in your example, if your high price is $10.00, and a divided of, say, 0.11 is paid, your new high price becomes 9.89 from which to calculate the 7% trailing stop loss point.

That is not only important for dividend paying bond funds, but also for equity funds, which will all declare their yearend distributions within the next 30 days. To be accurate with your trailing sell stops, you need to reduce your high price by this amount, no matter whether it consists of dividends or capital gains.

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Comments 7

  1. I'm glad you posted this. I knew it, but since I'm new to following your investment strategy I may have forgotten to account for dividend payments in this next month.

  2. Am Confused – on bonds – bought at 95 ($950)- coupon 10% – have held for 4 years – collected $ 400 in interest – where do I set my stop ?

    jimarb

  3. Ulli, should I adjust the price based only on the last dividend, or is it cumulative? For example, I bought HYG in July, and it has paid a dividend of about .70 per month over the last four months. My highest closing price over the four month period was 87.00. Should my sell stop price be based on 86.30, i.e. 87.00 less the Nov dividend of .70, or should it be based on 84.20, i.e. 87.00 minus 2.80 which is the 4 months dividends I received?

  4. Ulli, thanks so much for your work here. It has helped me tremendously.

    Should I reduce my highest closing price by the dividends if I didn't reinvest those dividends and just took them as cash?

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