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
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections...
Investors who are looking for quality stocks that regularly raise dividends have several lists available as a starting point in their ...
My investing goals are very simple – to cover my expenses from dividend income generated from my portfolio. In order to translate goals in...
Every dollar that you have in your possession can be traced back to you exchanging your labor for money. The labor you provided was essentia...
I have highlighted below several frequently asked questions about dividend investing. This is not an all inclusive list, but more of a runn...
Motif Investing is an established brokerage which lets investors create their own portfolios, and purchase them for a set commission. Each...
There are many misconceptions about dividend investing. I have tried itemizing several of them, outlining them, and providing a brief comm...
There are four key attributes that need to be considered, in order to be successful at dividend investing. These ingredients include focusin...
There are two schools of thought when it comes to dividend reinvestment. One of the options is to automatically reinvest dividends , wherea...
I have been writing about dividend growth investing since January 2008. I often get asked questions by readers. Many of those questions in...