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.