So far I have only concentrated on the idea of picking up great companies which have a history of increasing payments and which have a higher than average probability of increasing their payments in the future. I have explored the ideas of dollar cost averaging, my screen for entry criteria and my ideas on portfolio diversification . But when would I consider actually selling a dividend stock?
To be perfectly honest the answer is not a black and white one.
Initially I had mentioned that I planned on selling my stocks only in the occasion that a company that I own cuts its dividend. Even though my entry criteria is to buy companies that increase their payments over time, a company that I hold and does not raise its payment is on my radar. However, as I continuously add funds to my portfolio, the stocks that are unable to raise their dividend would not get any extra funding. Thus their proportion in my overall portfolio will decrease over time.
Is it really a good idea to sell stocks that cut their payments? What if this is just a temporary solution? Typically, when a stock cuts its dividend, the stock had already lost double digits from its recent highs, prior to the announcement. After the announcement, all dividend investors rush for the exits, creating even further supply in the stock thus pushing the price even lower.
I looked at Consolidated Edison’s (ED) long-term chart for this exercise. From my previous analysis of ED I had noticed that the company had cut its dividend in 1974. The stock did fall by about 50% in April 1974. Had you sold at that time, you’d have been happy when the stock fell to $6/ share and when the dividend payment was cut by more than 50%. By February 1977, however, the dividend was even higher than the previous dividend and the stock was a little bit higher as well. Investors received increasing dividend payments for over 32 years since that moment.
Next week I will share some additional research that helped in my decision to sell or hold stocks that cut their dividend.