Investors that buy dividend stocks are typically long-term investors. These buy-and-hold investors are much less interested in capitalizing on short-term price swings and more focused on producing solid, long-term returns.
At eDividendStocks.com, we tend to focus primarily on identifying good dividend stocks to buy and probably don’t give enough attention on when to sell dividend stocks. In today’s markets, there are quite a few attractive dividend stocks with high yields to help bolster investor returns. However, it is often easier to know when to buy a stock than when to sell it.
While it’s true that many investors will simply hold onto their dividend stocks forever, is that investing strategy right in every situation? Are there any indicators that will tell you when to sell dividend stocks?
Unfortunately, there is no magic red light that goes off on your investor dashboard that will tell you when to sell your dividend stocks. However, that doesn’t necessarily mean you should continue to hold them forever either.
There are really two major sell signals that investors should watch when investing in dividend stocks.
The first indicator is stock valuation. Investors should be wary of inflated valuation multiples for any stock. A stock, even with a decent dividend yield, that is valued at a much higher level than the market itself and/or its peers, is at risk of seeing its stock price fall to more reasonable levels. When this happens, your returns could be significantly impacted.
In a normal market environment, stock valuation levels will never get so out-of-whack that you will need to consider selling, but we have all experienced periods when market valuations become completely unrealistic (anyone remember the late 1990’s?).
The second indicator for when to sell dividend stocks is cash flow. Free cash flow is often a better indicator of company’s financial health than their net earnings. There are multiple accounting methods/tricks available to manipulate earnings, but it’s is much harder to manipulate cash flow (at least legally).
Obviously, firms with declining or negative cash flows generally can’t continue to pay out dividends. The time to sell a dividend stock is not when they announce that they are reducing or eliminating their dividend. By then, you have generally waited too long. However, savvy investors know when to sell dividend stocks. If there is a strong likelihood that a company will cut their dividend, it is probably a good time to get out of that stock.
Disclosure: No Positions