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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:

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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

Normally, as dividend stocks’ share price and dividends rise over time, the yield on their initial cost should also rise. However, when there are declines in share price, dividends or both, the yield on cost will also decline creating an inverted yield on cost.

Unfortunately, for my most of my income holdings and my income portfolio as a whole, yield on cost is inverted. Of the 35 securities currently in my income portfolio, only 11 of them are not inverted. Since my core rule is to sell a stock when it drops its dividend, all the inversion is coming from declining price. Stocks with an inverted yield resulting from a price decline would include these:

• Bank of America (BAC) – Current Yield: 8.22% – Yield On Cost: 5.39%
• American Capital (ACAS) – Current Yield: 19.00% – Yield On Cost: 10.45%

Of the 11 equities that are not inverted, some of this is due to a long holding period. Put another way, I bought them so long ago that the combination of share price appreciation and increased dividends more than offsets the recent downturn. Two in this category would be (current yields as of 8/29/08):

• Health Care Property Investors Inc. (HCP) – Current Yield: 5.02% – Yield On Cost: 5.71%
• Commercial Net Lease Realty, Inc. (NNN) – Current Yield: 6.61% – Yield On Cost: 7.00%

Securities held for a short period of time easily swing into and out of an inverted position. I don’t put too much emphasis on a security’s yield on cost until it has been in my portfolio for a minimum of one year and has at least one dividend increase. Two in this category would be (current yields as of 8/29/08):

• Procter & Gamble Co. (PG) – Current Yield: 2.29% – Yield On Cost: 2.48%
• PepsiCo, Inc. (PEP) – Current Yield: 2.48% – Yield On Cost: 2.51%

An inverted yield on cost is not always bad thing. It can sometimes indicate a bargain price, but it can also indicate a company with some serious problems. As always, a detailed analysis needs to be performed before you decide the reason for the inversion.

All current yields listed above are as of 8/29/08.

Disclosure: Long in BAC, ACAS, HCP, NNN, PG and PEP.