When to sell a dividend paying stock
If you watched one of your investments drop 10% in value, would you sell it?
What about 20% in one year?
What about over 50% since 2008?
A company I own has recently fallen out of dividend-favour and the plunge for this company might not be over. It’s one of those established dividend paying stocks, you know, those stocks that are supposed to be fairly safe equity investments?
First, let’s back up the truck a bit…
Dividend stocks have lots of appealing factors. Some stocks have a great dividend yield, providing steady income in good markets and in bad. It’s a big reason why I’m growing my portfolio with them. Some of those same stocks have a great dividend history. Their history has been so strong there is no reason to think the future for these companies will be any different. Other companies still, the best of the best, increase their dividends year after year after year. There are many reasons to dividend paying stocks. What about reasons to sell them?
In my example, the company I’m talking about is TransAlta.
Back in 2010, I said I was thankful for low TransAlta prices. In that post, I wrote the following:
“Earlier this year, I received almost two (free) shares of TransAlta stock because of my synthetic DRIP. In the end, I only got one. You know this story well; set up the DRIP for free with your discount brokerage; tell them you want all stock dividends paid to you to buy as many whole shares as possible each quarter; tell them what’s not reinvested into stock(s) to be deposited as cash into your brokerage account for future purchases; yada, yada. Well, as a dividend investor, I want TransAlta prices to stay low or go lower because when dividend payment time comes around (every quarter) it gives me the chance to buy more shares. High TransAlta prices never do me any good because I can’t buy as many whole shares via my synthetic DRIP. On the other hand, the better hand, I’m hoping for low TransAlta prices because that gives me an opportunity to buy more whole shares.”
How I am feeling now, with the TransAlta stock price considerably lower? A little nervous actually.
If your nerves are shot, here are some reasons for selling your dividend paying stock:
The company has changed (too much)
The market share has bottomed out or revenue has declined beyond repair. These are just a couple of outcomes from poor management and could be a few reasons to “get out” of a dividend paying stock. Businesses need to change with time but it needs measured and calculated. A key question to ask: is anything wrong with the company?
The company is overvalued
If a stock has become overvalued because of a market run-up, it might be time to take some profits off the table. Recognize if you do this, in some accounts, you will incur a capital gain. Markets are largely efficient in my opinion but valuations do get out of whack now and again. So, another key question to ask: if I take some profits, are there better opportunities available to invest the cash?
The dividend has been reduced or eliminated
TransAlta is now at this crossroad in my opinion. If the dividend is held static, at $0.29 per share per quarter, it could be sign that management does not acknowledge the dividend payment is at an unsustainable level. On the flipside, if management cuts the dividend, the stock price will rise over time and more importantly maybe the company will be back in favour sooner than later. Lowell Miller, author of The Single Best Investment says “dividend cuts are the kiss of death for stock pricing generally” but I don’t necessary subscribe to this theory. I never want a company I own to continue to pay a dividend just for the sake of doing so – it can be a healthy decision to make the haircut. The final key question to ask: what are the long-term prospects of this company? If in the short-term, a dividend cut is required to get the company through a rough patch, I can stomach and would applaud management for that. Dividend elimination – that would likely be my trigger to sell the company.
Coming back to my current case study, TransAlta is no doubt causing me some grief. I don’t like to see my companies suffer, but such is the risk of direct stock ownership. Indexing would much easier. 🙂
Even though I’m down almost 20% from my original purchase price, I’m not going to make a move with my TransAlta holdings. I continue to believe in the long-term prospects of Canadian utilities, including this one. I continue to earn a decent yield and steady income from this investment. I continue to earn more shares every quarter via DRIPping this stock. So far, the benefits outweight the risks but I might not always feel this way.
What would you do? Would you sell a stock that went down 20%?
Have you bought, owned and sold TransAlta in your portfolio?