The 'Sell After Dividend Cut/Freeze' Rule, With Exceptions

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:

Symbol	Date Sold	Sell Price	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:

Symbol	Date Froze	Freeze Price	“Sell Price”	%
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 frozen 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 fallen over the last year or so, but virtually every other stock has fallen too. 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

Comments

[kewgardens:]

Do you apply the same philosophy to closed end funds? I would think a more nuanced approach is necessary in such cases, as many funds institute small cuts at times (i.e 12 cents per month to 11 cents per month) only to restore or increase the dividend at a latter date.

P.S. Do you think that RY can maintain its dividend?

Mar 12 06:00 AM

[Dividend Gr...:]

D4L,

Actually a dividend freeze might not be a bad thing. You shouldn’t really adjust your portfolio strategy based to follow the past market action too closely.
In the past stocks like WYE or K have frozen their dividends, but then resumed their payments. Furthermore what happens if a company freezes its quarterly dividends, and 5 quarters later it increases the dividends again? On an annual basis your dividend income from the stock could still be increasing.
Try researching dividend freezers over the past decade or two and only then determine if you should sell after a dividend freeze or not.

Best Regards,

Dividend Growth Investor

Mar 12 06:35 AM

[Toeser:]

This may be the right action in any market, but this sample is hardly conclusive after one of the greatest bear runs in history. I am guessing you could easily find 10 stocks down every bit as much (except the one at zero) that have not cut their dividends.

I am not challenging the writer's methodology, just that the environment clutters the data.

Mar 12 08:04 AM

[pondee:]

Toeser makes a valid point. What stock is not down from the past several months to the past year?

Mar 12 08:10 AM

[Pj568:]

Hasn't anyone ever heard of using that old fashion money management technique, a "stop loss"?

Mar 12 09:22 AM

[notsosmart:]

n o matter what the cut if the co is good & the yield is above 4% you might be better of than a bank.there are no rules for a situation like this one.lying,fraud,phony rated paper,funny accounting #s is the name of the game.the gov. changes the game weekly.goldilocks is having a hard time growing her mustard seeds.

Mar 12 11:53 AM

[CARMEL:]

CAN YOU ELABORATE ON YOUR USE OF 'FREEZING'.
I DO NOT RECALL EVER READING THAT A COMPANY HAS ANNOUNCED A 'FREEZE'
THANKS

Mar 12 01:57 PM

[LadyInez:]

If your ownership of the Bank stock is several years old, at a much higher basis than the current Sell price, do you still advise selling it for a capital loss or hanging in there if you don't need the cash right away?

Mar 12 04:36 PM

[toomuchgas:]

Looks like it is time to buy some of the stocks that are still around.

Mar 12 06:59 PM

[Football Geek:]

I held Sara Lee for a number of years before they re-structured, and cut their dividend. After a few years
they increased it again, however the underlining
problems in the company has effected on the price. Warren
Buffet always says, once a company re-structures they are dead money for a number of years.

Mar 13 09:14 AM

[David Van K...:]

Here's the skinny on Royal Bank of Canada:

1. Until 2008, their dividends changed every quarter, with the first dividend of each year often being less than the last dividend of the preceding year.

2. However, when added up annually (which is the most helpful way to look at it), their total annual dividend has gone up each of the past 5 years.

3. Their August, 2008 payment was declared as $0.50 on May 29, 2008. I find no mention of a "freeze."

4. Nevertheless, they have held their subsequesnt payments at $0.50 since then, including this April's payment, which was announced on February 26, 2009. April's payment will be the 4th consecutive payment of $0.50.

5. The announcement also included a notice that investors in their dividend re-investment program would be granted shares at a 3% discount to current market price, which some would view as a dividend increase.

6. If they hold their dividend at $0.50 for the rest of 2009, their total payout in 2009 will be an increase over 2008's total. The increase will be just $0.01.

7. If they raise their dividend any time in 2010, their record of consecutive-year increases will remain intact.

Mar 13 11:37 AM

[change is t...:]

Thank you for the focus on dividends and sell methodology. The whole buy/hold/sell rationale for diviend stocks can be kludge, and your methods make intuitive sense. I also appreciated the comments given to what you have written. In a market like this it seems if it doesn't pay a dividend, it is just a baseball card.

Mar 13 12:31 PM

[prudentinve...:]

A very sensible and excellent article. However, those who say that the stocks mentioned by the author are down just because of the general market downtrend have a very good point.

The author would be commended if he were to present, in a future article, data over a longer period, and to show the change suffered by the stock which froze or cut its dividend relative to the change in the S&P500 12 months after the dividend freeze or cut. My hunch is that the author would indeed find a correlation that concurs with his current thesis.

Having been a dividend investor for over thirty years, my experience is that dividend cuts are usually (perhaps 80% of the time) a sign that a stock will underperform.

Mar 14 09:50 AM

[Dirty Larry:]

It's good to keep in mind the fact that Dividends4Life has a specific goal in mind: that being growing an income portfolio, and managing it; income dividends are the entire purpose, and the only reason for getting interested in a particular stock in the first place. I just happen to be doing the same thing.

Selling on a dividend cut is therefore a no-brainer. You then take the cash from the sale and put it into something better. Continuous research should have some candidates ready on the sidelines.

It just so happens that dividend cuts also foretell, with a high correlation, that the subject stock is ready to tank; there are likely deeper problems which will come to the fore.

The dividend 'freeze' subject is very interesting. However, the drop in stock price after a freeze is not particularly convincing to me on its own, since the entire market, as a whole, has lost about half its value of late. However, the idea certainly has enough merit to be watched and studied.

Mar 14 10:41 AM

[antiquary:]

The only reason to sell after a dividend cut is to avoid the value-trap effect by which all those in it only for the immediate cashflow haul their freight out of Dodge. Once that has subsided, the fact that the company is not paying a dividend or not as much of one is not a reason not to own it in these economic times. I would just put the money back in at the new reduced level-- assuming always, of course, that it's still a worthwhile business, without which you shouldn't have been in it in the first place-- and wind up with more shares than you had before for the same money.

Mar 14 11:24 AM

[samwise:]

Couldn't agree more than with Antiquary. "dividend investing" is a style--no better, or worse, than any other although in the nineties it sure looked, well, "antiquarian." Interesting too in this total market collapse (still believe this is just another bear market?) it is those companies that had those "solid dividends" that have been completely obliterated. Tech stocks that rarely if ever have paid dividends still have much farther to go to get back to their 9/11 lows. Says to me that what was true after going into the 9/11 collapse is just as true today: if you're larded up with debt as a coporation you're nothing more than a financial ticking time bomb. Want proof? Just look at GE itself. It's borrowing in the debt markets? All with government gurantees. And the stock price? Still pretty much zero. The only bigger morons than the clowns like "Jeff" Immelt running the place? The investors in the company. That includes your government by the way and ulitmately YOU.

Mar 14 03:49 PM

[Crankly09:]

This article is rubbish, all apologies to the author. I know the facts, figures and trends but we are in a different economic enviroment that we have ever seen before and companies need to react to this new environment with cost cutting measures like dividend freezes or reductions.

Once we are past the fear and lunacy that makes our current market impossible to forecast, we SHOULD be able to see all of the companies (in which we invest) accurate financial situation.

I own several of the above mentioned stocks and will still buy, as a return to old form is eminent....someday. I would just hope that new regulations and the more detail oriented due diligence performed by the new regulators, will force all publically traded companies to let us know if they are a true diamond or just cubic zirconium.

Mar 15 04:51 AM

[Maxe Paul:]

I could not think of any stock that would either freeze or cut it's dividend and go up! It make absolutely no sense at all. It just appears to be plain common sense realy.

To me it's just like saying you should sell your stocks in a bear market and buy stocks in a bull market.

Did we realy need confirmation of this?

Mar 15 11:18 AM

[kztd:]

um, SFI is up 50% from your sell price as of today. Still no dividend though.

Apr 17 03:30 PM

[whisperonth...:]

As a dividend lover, but a relative newbie, I appreciate the insight in the article as well as most of the comments. (I choose not to pick my stocks based on political reasons.) I have some stocks that fluctuate with a variety of things, i.e., oil-based stocks that change based on the price of oil, energy stocks that vary frequently, etc. Some, over the years, have low periods and high periods. I've kept those, because they did have such nice payouts in 2008, and are still paying, but slightly lower. Some, gradually, are coming up again.

I will watch for some of the things you've discussed, and make my decisions based on a combination of my logic and yours. My choice may not change, but at least I'm considering the options.

Apr 28 10:45 AM