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In a recent post, I wrote about how I had altered my investing code to reflect that I would now be selling dividend stocks soon after a dividend cut. This is quite a departure for me as I traditionally had not sold stocks very often. However, given my primary objective to generate a reliable and growing stream of income from dividend stocks, stocks that cut their dividends do not allow me to achieve this goal and something must be done about it.
There are really only two things that a dividend investor can do after a dividend cut. The first is to hold on to the stock and wait (hope) for the stock to recover and the dividend increases to continue. This can take years and may in fact never happen. The second thing an investor can do is to sell the offending company and invest the proceeds in another company that is growing dividends at a fast and high growth rate. This second option is the one that I have decided to go with and have recently acted on this through the sale of two stocks within my portfolio.
It will come as no surprise to dividend investors that the stocks I decided to cull were Bank of America and Citigroup. Both of these stocks have had to enact dividend cuts in order to survive which is not a good situation to be in. Both of these companies are on shaky ground, with Citigroup worse off than the other. This poor management and poor performance has no place in my dividend growth portfolio and I am happy to get rid of them.
I have learned from this experience. A buy and hold philosophy, which I still strongly believe in, does not mean that an investor will never sell. The whole premise of the buy and hold is to ensure that you hold the best stocks and let them run. It does not mean that you buy the stock and forget about it through thick and thin. Crappy stocks can really drag down a portfolio and holding them can be disastrous so it is prudent to get rid of them. If you want to be a true buy and hold investor, then index funds are the way to go. With individual stocks tough decisions must be made.
Where the proceeds ended up will be the topic of a follow-up post. Stay tuned…
What if 75% of your stocks cut their dividends? Would you sell them all?
I don’t hold either (BAC or C) but I would completely agree with discarding Citi after what has transpired. The company is just as likely to be sold off now or restructure in a form that’s unfavourable to common equity holders.
BAC though, despite their cut, I see as a longer-term company that should weather this storm to emerge on the other side stronger. The cut was necessary for survival and I would expect them to begin raising it again after five years. You can always re-enter the position then if you want, but taking advantage of any tax-loss selling (if unregistered) would also be a prudent decision at this time of year. I guess it depends on whether an investor believes that their capital is better off elsewhere vs. selling a stock simply because it cuts.
As we look back on this period of time, were there clues that the companies would cut their dividends? Was the payout ratio climbing, maybe the dividend growth rate was slowing, etc. One reason I use a dividend “growth” investment strategy is to spot companies that may be about to encounter some sort of business difficulty; hence a significant stock price decline.
Having said all of the above, this has been an especially tough market since about all stocks have seen a significant contraction in their stock price.
MG,
If 75% of all companies cut their dividends then you’d have 25% that would have maintained or increased it.
During the Great Depression many companies cut their dividends.. But there were still some notable ones that kept them or even increased them.I would be much more bullish on stocks that don’t have to cut their dividends even during a great depression.
The most important thing is preservation of capital. True it does seem like a purchase of BAC at 42 and a sale at 28 sounds like a buy high, sell low philosophy. But when BAC, or C cut their dividends, they set a precedent that its ok to cut and mgmt admitted they are in trouble. Remember that in the US ( and probably Canada) the dividend is a sacred cow. You don’t cut it untill you know that the situation is out of control.. Furthermore as the dividend is cut, then the main reason why as a dividend investor you entered ( to achieve a growing stream of dividend income) is not true anymore..
MG,
I am not sure of what you are getting at with your question. If 75% of the stocks in my portfolio cut their stocks then yes I would sell them. It comes down to prudent portfolio management and risk management. I would deploy that money into stocks that were more likely to continue dividend increases.
I sold BAC the day they announced the dividend cut. First, it was the first cut in decades. Second and most important to me was the fact the CEO stated many times the dividend was not going to be cut and low and behold months later it was cut. I don’t like being misled by management.
TDG: Selling after a dividend cut has been prudent in this market. Here are the 5 I sold this year after a dividend cut:
SFI Sold: $2.32 Now: $1.19
ACAS Sold: $6.50 Now: $4.09
BAC Sold: $28.51 Now: $14.80
FR Sold: $10.22 Now: $7.56
STI Sold: $36.43 Now: $29.63
Albeit, 3 of the 5 were in my risky category, the two banks were “safe” investments when I bought them.
Best Wishes,
D4L
D4L, The fact that stock prices of these particluar companies are lower after dividend cuts proves very little. The market has tanked. I could choose many companies that have raised or sustained their dividend and they are much lower today than they were months ago as well.
In investing, just as in life, I am not really a believer in ‘hard and fast’ rules. Looking at the situation from all angles and using common sense to consider all factors is more my approach.
It is quite possible that during a major depression every company you own could cut their dividend. I guess you would sell out of the market completely at a much lower price than you got in.
great post!