Wednesday, April 16, 2014
When to sell your dividend stocks?
Ideally, your holding period should be forever. Investors who purchase shares in prominent dividend paying companies with the intent of flipping them within a few months are likely to make a lot of mistakes. This is because by frequently buying and selling stocks, investors incur costs such as taxes and commissions, which drain their capital. Studies have shown that the investors who make the most trades per year tend to earn mediocre returns at best. This is because a successful investment would likely pay in rising dividends over many decades to come. A lousy investment would be one where dividends are cut or eliminated as earnings per share decline. Even the best businesses can experience such adverse situations a few times during their lives. A patient investor should let the company work its problems out, especially given the fact that they are in it for the long haul, as long as dividends are at least maintained. You have already delegated your investment in the hands of company management indirectly, who work to increase earnings and pay you the dividends. Thus, micromanaging business conditions does not strike as particularly rewarding. Many times companies fall onto hard times, and keep a dividend frozen, only to resume increases in a few quarters or years. Just think of General Mills (GIS), which has paid dividends for over 115 years, and has never cut it. There have been times where it achieved a streak of 30+ years of consecutive dividend increases, followed by a few years where dividends were frozen.
An impatient investor who sells after dividend freezes might increase portfolio turnover dramatically, increase their investment costs, and sell securities which have experienced temporary turbulence. For example, in 2009, Hershey (HSY) froze dividends, thus ending a 30 year streak of dividend increases. Selling would have been a mistake, as the company resumed increases a year after it kept distributions unchanged. The dividend has since increased by over 60%, which is not too bad for a five year holding period.
When a dividend is cut or eliminated however, this is management’s way of saying that things are indeed bad. Dividends are a sacred cow, which might be frozen from time to time, but very rarely cut or eliminated. As a result, a dividend cut shows that this business is likely in trouble. As a dividend investor, this is when I decide to sell my position automatically. This safeguards the capital left, and provides a fresh perspective after the sale is done. The reason for this automatic sale is to prevent me from being overly emotionally attached to a stock, and rationalize my holding until it is too late. For example, dividend investors in Bank of America (BAC) enjoyed a rising dividend for 30 years in a row, before the dividend was cut two times between 2008 – 2009. This took the quarterly dividend from 64 cents/share to 1 cent/share If you sold right after the first announcement, you could have managed to get out around $29 - $30/share. If you held BAC stock for the past 20 years however, and you rationalized that the bank would eventually bounce back, you suffered from no dividend income on this portion of your portfolio for 5 - 6 years in a row. Sometimes, admitting mistakes is difficult, but costly if nothing is done about it.
If the dividend cut is reversed and the company initiates or increases dividends, you can get back in. In a typical dividend growth portfolio consisting of 30 – 40 securities, I would expect a dividend cut to occur at least once per year. On the bright side, if 39 portfolio holding raise distributions by at least 2.50%, and one completely eliminated distributions, your income will stay flat. Chances are however that the 39 companies will increase dividends by 6%/year, and the capital you deploy from the dividend cutter will generate some return when invested elsewhere.
Full Disclosure: Long GIS
- How to Manage Your Dividend Portfolio
- How to analyze investment opportunities?
- When to buy dividend paying stocks?
- Where to search for investment opportunities?
- How to identify your dividend investment goals
S&P 500® Dividend Aristocrats measure the performance S&P 500 companies that have increased dividends every year for the last 25 con...
This is a guest post written by Retire Before Dad. He writes about dividend investing, personal finance and travel at the Retire Before Dad...
This is a guest post from Roadmap2Retire blog , which documents the retirement journey of a dividend growth investor from Canada. I am an ...
I have shared with you early in the year, that I am essentially living off dividends and side income in 2016. I am saving my other income i...
Investing in dividend growth stocks has been a winning investment over the past 8 – 10 years. I myself have invested in dividend growth stoc...
Last week I shared with you the list of 2016 Dividend Aristocrats and its performance over the past decade . In addition, I isolated twenty...
As an investor, I have always believed in diversification . I would rather err on the side of caution, rather than swing for the fences. It ...
The Procter & Gamble Company (PG), together with its subsidiaries, manufactures and sells branded consumer packaged products worldwide....
Unilever PLC (UL) operates in the fast-moving consumer goods market in the Africa, Americas, Asia Pacific, Europe, and Middle East. The comp...
I believe that diversification is the only free lunch in investing. However, different investors have different takes on the topic of diver...