Friday, June 20, 2008

When to sell your dividend stocks?

So far I have only concentrated on the idea of picking up great companies which have a history of increasing payments and which have a higher than average probability of increasing their payments in the future. I have explored the ideas of dollar cost averaging ( link), my screen for entry criteria ( link) and my ideas on portfolio diversification (link). But when would I consider actually selling a dividend stock?
To be perfectly honest the answer is not a black and white one.
Initially I had mentioned that I planned on selling my stocks only in the occasion that a company that I own cuts its dividend. Even though my entry criteria is to buy companies that increase their payments over time, a company that I hold and does not raise its payment is on my radar. However, as I continuously add funds to my portfolio, the stocks that are unable to raise their dividend would not get any extra funding. Thus their proportion in my overall portfolio will decrease over time.
Is it really a good idea to sell stocks that cut their payments? What if this is just a temporary solution? Typically, when a stock cuts its dividend, the stock had already lost double digits from its recent highs, prior to the announcement. After the announcement, all dividend investors rush for the exits, creating even further supply in the stock thus pushing the price even lower. I looked at ED’s long-term chart for this exercise. From my previous analysis of ED ( link) I had noticed that the company had cut its dividend in 1974. The stock did fall by about 50% in April 1974. Had you sold at that time, you’d have been happy when the stock fell to $6/ share and when the dividend payment was cut by more than 50%. By February 1977 however, the dividend was even higher than the previous dividend and the stock was a little bit higher as well. Investors received increasing dividend payments for over 32 years since that moment.


Next week I will share some additional research that helped in my decision to sell or hold stocks that cut their dividend.

Relevant Links:

- Diversification and portfolio allocation
- Diversification Matters
- The case for dividend investing in retirement
- Why do I like Dividend Achievers

6 comments:

  1. Good perspective. I think the hardest thing to do when investing in stocks is to know when to sell.

    ReplyDelete
  2. Passive Family Income,

    I myself like what Buffet says - Your holding period is forever.

    Thanks for stopping by!

    DGI

    ReplyDelete
  3. May I ask: Since I think everyone is a Buffet lover. I was reading one of the many books on him. In this book they were saying the Buffet always stated to stay away from companies that give dividend in place of companies that reinvest all that money into the business. Can you go into that alittle further?

    ReplyDelete
  4. Will,

    I wouldn't believe 100% of what books about Warren Buffet say. I would rather check into his stock holdings through his publicly available reports. Stocks like JNJ, USB, KO, BUD, WMT etc ( which Buffett owns through Berkshire) are some of the best dividend stocks out there.

    Please let me know if that answers your questions!

    Thanks for stopping by!

    Dividend Growth Investor

    ReplyDelete
  5. When to sell is undoubtedly one of the trickiest questions for dividend investors.

    Unlike growth shares or turnaround situations, you're not interested so much in the share price as in the income stream so theoretically you can ignore the former.

    In reality, falling share prices can of course be a signal of dividend cuts to come.

    I take the point of your graph, but such historical time frames can be deceptive. That was 3 years between 1974 and 1977 when you would have held the share reading endless bad news about it, seeing it staring at you red and wounded in your portfolio.

    When you consider the current bear market is about 12 months old and the investment world is near suicidal, what seems like a blip on a graph is ultimately much more taxing in reality.

    ReplyDelete
  6. Monevator,

    I now consider selling immediately after a dividend cut. Many stocks that cut dividends early in 2008, are now cutting or eliminating dividends. Many early dividend cutters in early 2008 are also bankrupt right now as well.

    ReplyDelete

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