When I add a stock to my dividend portfolio, it is my intention to hold the stock forever. However, sometimes selling a stock is the right thing to do. In determining when to sell a dividend stock, I have one hard and fast sell rule: When an individual stock held as a dividend investment lowers its dividend, immediately sell it. This rule has served me well. Since I have begun chronicling by investments online, there have been several stocks I sold immediately after a dividend cut. Here is a list of those stocks with my exit price and a recent price:
|Washington Mutual Inc. (WM)||12/11/2007||$18.11||$0.00||100%|
|Wachovia Corporation (WB)||4/15/2008||$25.89||$5.54||79%|
|iStar Financial Inc. (SFI)||10/3/2008||$2.32||$1.09||53%|
|Bank of America Corporation (BAC)||10/7/2008||$28.50||$3.14||89%|
|SunTrust Banks Inc (STI)||10/28/2008||$36.43||$9.36||74%|
|First Industrial REIT (FR)||11/4/2008||$10.22||$2.51||75%|
|American Capital Ltd (ACAS)||11/11/2008||$6.50||$0.59||91%|
|Pfizer Inc (PFE)||1/27/2009||$15.64||$12.73||19%|
|General Electric Co (GE)||2/27/2009||$8.59||$7.06||18%|
|US Bancorp (USB)||3/4/2009||$12.70||$8.82||31%|
The “%” column is the percentage decrease between the “Sell Price” and “Recent Price”. As you can see, each of the stocks continued to fall after it was sold. That adds substantive evidence that my sell after a dividend cut rule is the correct thing to do. With that said, I have begun to question if there were other indicators that should have led me to an earlier sale. Four of the above stocks have one other thing in common – they froze their dividend before cutting it. The table below shows those stocks and the price on the dividend freeze date (declaration date), along with the three stocks I currently hold with a frozen dividend:
|Bank of America Corporation (BAC)||7/23/2008||$30.64||$28.50||7%|
|Pfizer Inc (PFE)||12/15/2008||$17.36||$15.64||10%|
|General Electric Co (GE)||9/25/2008||$25.25||$8.59||66%|
|US Bancorp (USB)||9/16/2008||$33.34||$12.70||62%|
|Home Depot Inc (HD)||11/15/2007||$29.07||$18.00||38%|
|M&T Bank Corp (MTB)||7/23/2008||$68.51||$31.85||54%|
|Royal Bank of Canada (RY)||8/28/2008||$45.68||$22.99||50%|
The “Freeze Price” is the closing price the first trading day after the dividend freeze was announced. The “Sell Price” for the first four (those that I have already sold), is the actual price I sold it for and for the three I still hold it is a recent price. Based on the above, it appears the prudent thing to do would be to sell a stock after it freezes its dividend. Like a dividend cut, an investment with a froze dividend is no longer aligned with my dividend portfolio’s goal of building an ever-increasing source of dividend income.
Care should be taken in considering that not only have the above stocks fell over the last year or so, but virtually every other stock has fell. So what appears to be hard and fast rules in this market, will need to be evaluated under different phases of the cycle. But for now, selling after a dividend cut or a dividend freeze appears to be a prudent rule to follow. However, I do not see the dividend freeze rule as stringent as the dividend cut rule. Each situation needs to be evaluated and sometimes an immediate sale is not warranted. Considering all this, I would phrase my dividend rule as such:
When an individual stock held as a dividend investment freezes its dividend, this is a strong sell indicator. The specific facts and circumstances should be immediately evaluated and continuously monitored until the stock is either sold or it increases its dividend.
If it is decided not to sell the stock, the pressure to sell should increase as time passes. Another strong indicator to sell would be if the dividend freeze persists long enough to incur a flat dividend year-over-year. Dividend freezes need to be monitored closely. In many instances they are the first step to a dividend cut.
Full Disclosure: Long HD, MTB, RY