What to Do with a Dividend Freeze

Includes: BAC, GE, HD, RY
by: Dividends4Life

Earlier in the month, we looked at reasons why to sell a dividend stock when it cuts its dividend. However, what should you do if a company simply opts to leave its dividend flat? This is happening more and more with the recent economic downturn.

The following stocks in my portfolio have frozen their dividends at the current rate per share (yields as of 10/24/08):

General Electric Co. (NYSE:GE) - 6.95%
Current Dividend: $0.31/share (last 5 quarters)
Previous amount: $0.28/share (September 2007)
2007 Dividend: $1.15
2008 Estimated: $1.24
Last Chance to raise: Q4/2009

The Home Depot, Inc. (NYSE:HD) - 4.86%
Current Dividend: $0.225/share (last 8 quarters)
Previous amount: $0.15/share (September 2006)
2007 Dividend: $0.90
2008 Estimated: $0.90
Last Chance to raise: Q4/2008

RBC Royal Bank (NYSE:RY) - 4.41%
Current Dividend: C$0.50/share (last 5 quarters)
Previous amount: C$0.46/share (August 2007)
2007 Dividend: C$1.88
2008 Estimated: C$2.00
Last Chance to raise: Q4/2009

Until it decided to cut its dividend earlier this month, Bank of America (NYSE:BAC) was also in this group. When the dividend was cut, I sold my shares.

When a company decides to freeze its dividend at the current rate per share, the first thing I do is put the stock "On The Shelf." This is a place I can set the security aside within my income portfolio with no additional purchases made until its outlook improves and it comes off the shelf, or deteriorates to the point it should be sold.

I look at dividends on an annual basis. This adds a degree of flexibility and opportunities for the company to hold the dividend flat for a period of time yet continue its string of annual increases. For example, if HD were to declare a dividend of $0.235/share in the fourth quarter of this year, it would show a year-over-year increase from 2007 ($0.91 vs. $0.90). I would then pull it off the shelf and move forward. I have listed above the last chance each stock has to increase its dividend and continue its year-over-year string.

If a company leaves its dividend flat year over year, the decision is not as clear-cut as a company that cuts its dividend. I will look at alternative investments, along with the company's current yield and future outlook. There is something to be said for a company that would not cut its dividend during difficult times.

Disclosure: Long in HD, GE and RY.

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