Dividend Growth Investor

When to Sell Dividend Stocks

Chris,

1) I focus most of my attention on the Dividend Aristocrats, achievers and champions. I wouldn't say they are more risky than other stocks. I don't chase yield, I am mostly following a balanced yield/dividend growth approach. If the whole stock market falls by 40% in 2009 I would probably lose money as well however. I would never purchase a stock that hasn't had at least an uninterrupted ten years of consecutive dividend increases, although i am mostly interested in stocks that have raised payments for over 25 yrs. Thus i wouldn't have bought GM.

2) I do own GE stock, but after they announced a dividend freeze I am not buying more stock there and buying other stocks with the dividends in receive. I wouldn't buy GS because it doesn't fit my entry criteria.

3) When I posted a bearish article on BAC on seeking alpha in july saying that I don't think dividend is well covered, someone told me how foolish I was to be waiting for the payout ratio to decrease so that the div is well covered. They told me that I would be a buyer when BAC is back over 40. I don't really mind paying a higher price for a stock that could show some resilience in revenues/growth and dividends over time. I don't like cyclical stocks. I do realize that my strategy leads to a higher exposure to consumer names however.

4) Not all companies cut their dividends in this tough environment. In fact most of the dividend aristocrats in 2008 either increased or maintained their payments in 2008. I am looking for rising dividend income. If a company has a strong business model which has enabled it to increase dividends for more than 10 or 25 consecutive years, then chances are it will keep raising them. I do try to be diversified accross sectors and dollar cost average however.

5) Lehman was buying millions in stock in 2008 at an avg price of $40. The price was pretty low. I would much rather have the company send ME the cash than the company deciding it wants to do it for me ( buy back stock). I do like moderation however- XOM does both stock buybacks and dividend increases. Actually most companies "conserving cash" now are the ones which are too leveraged and without cutting their dividends they know they will go belly up. The dividend payment is not their main issue - it is reckless management that used a lot of leverage in order to get big quick and get a larger bonus.


On Jan 06 02:03 PM Chris B wrote:

> 1) What will you buy after you sell? Riskier companies? Companies
> that have not yet announced dividend cuts, but soon will? Companies
> that are financing their dividends with interest-bearing debt (like
> GM did for years)? Companies that will be bankrupt in 6 months because
> they are spending their last cash on dividends to the benefit of
> insiders? Companies that are mostly interested in pumping up their
> own stock price in the short term? Yield chasing could be dangerous
> at a time like this. More responsible companies cut their dividends
> in severe recessions.
>
> 2) Are you giving your money to GE or GS so they can pay Warren Buffet
> 10% of it and give you back what is left? If a company you own has
> a choice of borrowing $100M at 8-10% interest to pay a dividend or
> cutting the dividend, which option would deliver more value to your
> company? Can you earn 8-10% on your dividend with absolute certainty?
> Again, GM paid a decade of dividends out of ever-mounting debt. Despite
> those dividends, shareholders never did get their investment back
> and never will.
>
> 3) Do you have a flip side to this strategy of buying companies you
> suspect will soon raise their dividend? If not, you'll always be
> buying and selling after the announcements, resulting in losses of
> value. Companies won't restore their dividends until the recession
> is well over. By then you'll be paying double the price for many
> of them.
>
> 4) How can you be sure that the post-dividend-cut underperformance
> of these companies was caused by the dividend cut and not by... I
> don't know... the recession perhaps? Massive reductions in earnings?
> Assets gone sour? Risk of bankruptcy? Which is the cause and which
> is the effect?
>
> 5) What if the company altered its strategy and is using capital
> for share buy-backs instead of dividends? This would be a smart move
> right now, with so many solid companies out there priced with single-digit
> PE's and below book value. Would you sell low when the company is
> buying out its other owners at 5 year lows? The same argument could
> be made for companies that are using their capital to buy underpriced
> business assets such as ships, oil leases, real estate, transport
> contracts, and competitors instead of sending out a dividend just
> to pump up their stock price.
>