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?
I bought TA for clients in 2009 through the $18 to $20 range, collecting the 5%+ dividend and by early 2010, exited all positions, while in a gain position, based on a lack of confidence in direction and that many other dividend yield stocks, with the same or better yield, offered much better risk-return. For the conservative, utility-loving crowd, look at STB as a defensive yield play with moderate upside in share price over the longer term!
Thanks for the comment Craig. Yeah, a bit worried about TA. I like the yield but the short-term prospects are concerning. Long-term, I’m very bullish on energy so there is a good chance of recovery.
STB has -ve EPS? Yield is a little scary for me as well, over 8% which is major dangerzone for me. Why STB?
Hi Mark,
Ahhhh I remember TA, I had to go way back in my data to find it.
I purchased TA back in Feb 14, 2003 for $17.04, and sold it on July 18, 2005 for $20.65. Including dividends I made a 33.72% return.
TA’s problems started back in 2004. I remember reading about the problems they were having plus the fact that they did not increase their dividend in 21 months (Oct 1, 2003 to July 18, 2005), I decided to sell.
Reading your post and seeing the price at $16.16 today, I’m glad I did not keep TA.
I rarely sell any more (I’m more of a buy and hold investor) but if I was in your shoes I’d probably sell. I remember Washington Mutual (WM), here was a bank that started in 1889, paid dividends for decades, then got into trouble, cut their dividend, the price dropped, investors bought more thinking this was a bargain, in the end the company went bankrupt. My WM shares were reduced to $0.
When yield gets too high, you have to be cautious. I bought WM when the yield was 9%. I see that today TA is at 7.2%.
cheers,
Kanwal
@Patrick
also, I don’t own any TA , to answer your question .
I believe in diversifying,—don’t we all ? , not all my eggs in one basket , I like the pipeline and services companies a lot, I think they are less affected by the changes in the price of oil. As a bit of a Newbie , I was surprised that even Exxon and Chevron do not increase very rapidly in value , I don’t have 30 yr. to just sit and wait for Growth, so I like mid-cap companies , with growth potential , or companies who are getting involved in big projects, (TRP) , hopefully they will have very good earnings because of that, and I think that’s a healthy sign if earnings are growing year after year, it reassures me , the company is performing ok , no matter what the company’s age, happy investing .
Indeed, we all do Patrick, re: believe in diversification. I’ve got ENB, TRP and IPL.UN so I’m pretty diversified for pipelines. I like them as well.
Mid-caps are more than fine, like any other companies, big, small; you just need to own a bunch of them.
You’re righ, as long as earnings are growing year after year after year, that’s great sign. I also like to see rising cash flow.
Happy investing to you as well.
Thanks for writing; I enjoyed that article and I can definitely relate to your challenge with TA (I’m not a holder, but have gone through similar experiences with other stocks). I try to hold approximately 15-20% in cash and when I see any of the stocks in my portfolio pull back, I purchase some more… then when it returns to its levels, sell the ‘extra shares’ that I purchased… it triggers a gain, but it helps me sleep at night because I consider this gain to be a cushion against any declines of my stocks and helps offset losses… Does anyone else do anything similar? I’d love to hear other opinions so that I could further improve my strategy… my goal first and foremost is holding quality dividend paying stocks for the long-term, but am always looking for ways to build up a an extra cushion of cap gains in case any of my stocks suffers a material loss over time.
Smart stuff J. Young, holding that much cash. I need to find more discipline for that…I don’t hold much cash except some money in my emergency fund.
Most of my stocks are running DRIPs, about 10 of 20 do, so when stocks pull back, they automatically buy more every quarter. I too, am looking to build a small war chest of companies when the market tanks or rockets up…I want to get paid either way. With the dividends that can’t be reinvested, then that money is saved and I look for new companies to own. I’d like to buy CNR.
Thanks for your comment!
I certainly can’t advise you on a decision especially that I am not familiar with TA. How close do you know the company? Have you ran your own scenarios? Do you still believe in itsfundamentals? This last question should help you with an answer.
I absolutely believe in the company. People need their services, but they could be a buyout target if things go really south.
Two years ago, I did own TA but the payout ratio, the heavy debt load and other factors made me nervous and so I sold out at a small loss. If I’m not mistaken, the price back then was in the high $20’s. If I held on to it, my losses would be substantial now. But who knows, may be it will turn around…
Probably a good call Elemag, but I continue to hold on. I get at least one new share every quarter, so at these TA prices, it’s good.
I believe in the company, people need its services, it should turnaround but you never really know…
Yes, we’ve owned and sold TA. I know that internally people are jumping off the sinking ship, which isn’t exactly a vote of confidence from your own employees.
Really eh? People jumping ship? Yikes. That doesn’t give me lots of confidence Calgary Girl! I believe in the company, its services, but that isn’t good.
I owned TA briefly but sold it when I realized that at best they wouldn’t be able to grow their dividend and at worst it was unsustainable and the dividend would have to be cut.
I like my dividend stocks to consistently grow their dividends, and I’ll sell if I don’t think they will.
Yeah, I recall you owned TA at one point. I definitely like my stocks to increase their dividends, but this one, TA, hasn’t done it in a couple of years. For the income, I think I will continue to hold…for now.
I have owned TA for far too long. I remember when an activist investor wanted to join the Board but then CEO Steve Snyder persuaded him not to. Big mistake. I have TA in both my investment account and RSP. I have decided, probably stupidly, to hang on and wait for the TRP/TA decision to be made in May. If TA loses then the stock will most likely fall to $12. At that point I may some more because at some point the company will get back on its feet.
I’ve owned TA for a couple of years. I only have TA unregistered, so at least I can take a capital loss if I choose that route. I won’t sell now, at least this week. It’s been down before, not this low for some time, but I think it will come back. Many people rely and their services, and worst case, they get bought out.
Just because a company has been here 100 years doesn’t mean it’s stable, does it? I mean, what happened to Lehman Brothers??
As for TA, I almost bought some last week. Would have been a bad mistake. Now thanks to your posts (MOA and Ninja), I will probably look for a div cut before considering.
Fair point Peter, but history is all we have. I don’t think TA is nearly as greedy as TA, but who really knows.
I think if you have a very diversified portfolio, it might be the time to take a risk with TA. I’m not as diversified as I would like, with my Canadian stocks (I’d like to own about 15 more to say that….) but I’m not really losing anything by holding TA. I think it will come back, but it may take years.
When a big historic company gets hit with some bad news it provides the best chances to acquire them at good values. Transalta has been around since 1909 so they obviously know a little bit about providing energy. Their history points to them being able to turn it around so one should have confidence in them. And as long as you think this is still the good company you invested in I would be buying more as the price gets lower and lower.
Smart man, buy more the lower it gets. I just hope I have the stomach to hold out. Being down 20% isn’t fun, but I’ll get paid for now to wait it out.
I have a few, especially stocks related to coal. It’s been brutal, after EPA regulations, but then I do believe in the fundamentals, I’ll hold on to them, for now.
Me too 🙂
Hey Mark, excellent post!
Here is a recap of what I already left as a comment on my post. A dividend cut would be a very good thing for TA. It won’t solve their current issues, but it would at least show investors they acknowledge the problem and are willing to work towards it. A big sign of confidence in my opinion. 😉
I am sure TA will find a way to work through their Sundance plant issues. If they cancelled the deal with TransCanada, and felt the plants were not in good enough shape to sell, then they must have had good reason to do so. I beleive as you do, that TA will work through it’s problems.
If they do cut the dividend, the price would crash, but I would consider being a buyer at that point – just like Canadian Oil Sands (COS).
Cheers
The Dividend Ninja
Thanks Ninja!
I suspect they will cut their dividend later this year, and if they do, it’s a good thing. It’s a sign that management is willing to take action.
Time will tell. For this week, I’m holding on 🙂