When to sell a stock after a dividend cut

When to sell a stock after a dividend cut

You know, tough question. That’s because I believe personal finance is very personal.

That personal part of finance is true whether you hold dividend paying stocks, any stocks for capital gains, Exchange Traded Funds, mutual funds, gold, real estate assets or anything else.

No two portfolios nor investment plans are alike – but we all likely share a common goal of financial independence and growing our household bottom line.

Should you react to a dividend cut?

I have.

Should you do the same?

Over the years, I’ve experienced a few dividend cuts:

1. Inter Pipeline (IPL) (72% cut)
2. Suncor (SU) (55% cut)
3. H&R REIT (HR.UN) (50% cut)
4. Updated – Algonquin Power (AQN) (40% cut as of January 2023)

Such cuts are never kind to my desire to grow my dividend income!

Sometimes, it’s worth selling a stock after a dividend cut. Sometimes, you hold or buy more. 

Enter again Mat Litalien.

Mat holds an MBA, is a Certified Health Executive professional, and is a diverse and respected blogger for Motley Fool, Seeking Alpha and a newer site to the Canadian investing scene Stocktrades.ca. If that wasn’t enough, Mat sits on the Board of Directors of Greater Sudbury Hydro as an independent director.

Mat was on the site recently when we discussed some potential top Canadian stocks ride out COVID-19.

Top Canadian stocks to weather COVID-19

Instead of carrying on yet another conversation on Twitter about when to sell stocks, I figured we’d have the discussion right here.

Welcome back Mat!

Awesome to be back Mark!

Mat, I referred above to the post that you believe are some great stocks to continue to own even during these volatile times. In fact, as you well know, one of our shared and beloved stocks (Suncor, ticker SU) cut their dividend.

Should you sell your stocks after they cut their dividend? Including Suncor?

If so, what is your criteria when you sell?

Mark, when I first started my dividend growth journey, I was of a strict mindset. If a company cut, or kept the dividend steady I’d cut bait and move on. However, I quickly realized that it is not that simple.

Case in point, many years ago Intel failed to raise the dividend for a couple of years. At the time, I believe it had a 10-year dividend growth streak. After doing my due diligence however, I found that it was likely to be temporary and my investment thesis (based on growth) was still intact. I held, and it has since performed very well. In fact, I am now up by almost 200% in my position.

In terms of dividend cuts, once again I believe it to be situation specific. Leaving COVID-19 impacts aside like Suncor you discussed above, I’ve had two companies cut the dividend – AltaGas and Goldcorp. I chose to sell Goldcorp and keep AltaGas. 

The gold industry was decimated in the last bear market, and at the time Goldcorp was booking big losses. The future didn’t look bright, so I chose to eat my losses. Fun Fact, Goldcorp was probably my worst investment as I ended up buying at peak prices in 2011 – ouch. Worth noting, the price never fully recovered, and it eventually was bought out. Selling was the right decision.

As for AltaGas, I felt as though it still had decent growth potential and that it would perform well (from a capital appreciation perspective). Turned out to be the right move – until COVID-19 hit. The dividend cut proved to be a catalyst that sent the company in a steady upwards trend in which it gained approximately 35% of its value in a little over a year. Then – the world changed. Still holding.

This was a long-winded answer but here is my bottom line – if your investment thesis has changed, then sell. If the investment thesis remains intact, there is no reason to rush into selling.

For those interested – I am keeping tabs of the performance of Canadian stocks post-cut/suspension. Here is the link to my Google Sheets doc.

https://docs.google.com/spreadsheets/d/1nHFQjhl0tWOwwGrAdeXauYyioMb9ZX4ima8NtqjJwmc/edit?usp=sharing

Great stuff for sharing that Mat. I’m sure my readers will have a look.

I happen to agree with you. My investment thesis on IPL, SU, and HR.UN has not changed and I believe this is actually a responsible move by those management teams to cut those dividends as much as they did – for company health. I will keep SU for now.

We always have to remember that while dividends are very good, it’s the overall return of the stocks we own that is key long-term. There is little value in owning some dividend paying stocks if you are always significantly under-performing the market.

Ok, so many TSX stocks have cut their dividend during the COVID-19 crisis. Your site is great to chronicle them and it’s why I have a new affiliate partnership with your team to stay up to date on Canadian stocks, watch your stock screens, see your “Bull Lists” and much more.

What other stocks in some key sectors might cut their dividends next?

I think most sectors that were at risk before, are still at risk today. The economy will not rebound overnight, and we’ve all heard the talk about the potential for a second wave of COVID-19.

Given this, I’d expect REITs, Energy, Consumer Discretionary and Financials to all be at risk of dividend cuts.

As for which companies? Any REIT in the retail or office industry are at risk. The return to work will be slow and gradual. Many big companies have already announced that work-at-home will be permanent. There still exists considerable uncertainty, and the extent of the fallout is not yet known. Keep on eye on monthly rent collections – anyone who is collecting at a 90%+ rate is in good shape.

Sienna Senior Living (TSX:SIA) and Brookfield Property Partners (TSX:BPY) are two I’d be concerned about.

I know BPY will be controversial. The Brookfield name is universally loved – but I am not sure if keeping the dividend steady is good business practice.  

The company’s dividend was looking stretched before COVID-19. The company has a targeted dividend growth rate between 7-10%, but poor retail performance (pre-COVID) led to a paltry 0.8% raise in early February.  Retail will continue to be a drag, and it recently announced that it had only collected 20% of rents in that segment.

Brookfield has a very complicated structure, and it can be difficult to fully understand their statements – they are masters at financial engineering. Perhaps through creative means, all Brookfield companies can sustain the dividend.

I question however, if it is good business practice. If BPY’s retail portfolio was struggling pre-pandemic, would conserving cash not be the more prudent course of action in today’s environment? Time will tell.

I liked your financial engineering comment – mind you, I’m a HUGE fan and investor in Brookfield companies. I also own RioCan REIT (REI.UN) but I think major box stores (as RioCan tenants) will come back to life in the coming months so maybe I shouldn’t worry so much about that one.

If or even when those particular cuts happen, I’m not sure I’m going to sell those companies either. Even though some stocks have cut their dividends, it could be smart to simply hold the stocks and wait for the company to rebound.

What is your take on riding out dividend cutters in your portfolio?  

Dividend cuts in this environment are unique. Once the economy rebounds, several which were suspended are likely to be re-instated. There are others, where the dividend cut is likely to be permanent.

The key will be to identify which are well positioned to rebound once the economy fully reopens, and which might take years to fully recover.

At the moment, I have three cutters that were triggered by COVID-19: Suncor and Inter Pipeline (like you Mark) and Disney (NYSE:DIS).

Honestly, for Suncor, I have not yet decided what I will do. For now, I am content to hold as I believe the price of oil will eventually recover to a point that Suncor will once again be cash flow positive (it needs WTI of $35/barrel). This should help the company’s stock recover.

Long-term however, I am not sure how I feel about the industry in general. This may result in me selling the stock.

Disney was never a high yielder, and I bought it for growth potential. I fully intent to keep the company for the long term and the recent dividend cut has no bearing on my investment thesis.

As for Inter Pipeline, I am also still holding. One of the reasons I bought the company was because of the growth prospects of the Heartland petrochemical plant. Pre-pandemic I knew that it would take perfect execution on the company’s behalf to maintain the dividend and finish Heartland.

The warning first came this past fall when it failed to raise the dividend as it normally would have. I kept then because of Heartland potential.

The IPL cut was a smart move but more disappointing, was that Heartland costs increased by $500 million. This was announced along with first quarter results – after the dividend cut in late March. Given this, I am of the opinion a dividend cut was imminent regardless of COVID-19 and the pressure on oil prices.

I am content on holding for now, but I am less confident in my investment. To date, Heartland was tracking on time and on budget – this made it attractive. The 14% increase in costs is certainly disappointing.

Wrapping up Mat, I firmly believe in my top-5 Canadian stocks for long-term growth beyond my growing list of U.S. stocks and ETFs. Those Canadian stocks are:

• Bank of Montreal (BMO)
• TD Bank (TD)
• Enbridge (ENB)
• Fortis (FTS)
• Emera (EMA)

Unless the apocalypse happens, and it might the way things are trending in 2020 (!) I don’t intend to sell any of these stocks. What are your top holdings Mat and why do you own those stocks?

Lastly, do you have your eye on owning any additional Canadian stocks in the coming months?

Mark, my top holdings haven’t changed since our last chat – they remain as follows:

• Toronto-Dominion Bank
• CN Rail
• Enbridge
• Fortis
• Telus

In my opinion, they remain best in class and are well positioned to navigate the current crisis.

Anyhow, I’ve always had several companies on my watchlist. Since I remain fully invested, any time I have cash – I tend to deploy it. There is always value to be found regardless of market condition. I believe firmly in the strategy – time in the market is better than time out.

That being said, I am averaging into my positions more cautiously – taking quarter positions instead of my usual half positions.

Today, I am looking at the following and these are highlighted in our Stocktrades.ca Premium:

Algonquin Utilities (TSX:AQN) and Capital Power (TSX:CPX) are on my list as I want to increase my utility exposure. I would add to Fortis, but AQN and CPX look more attractive to me from a valuation perspective. I already took a partial position in Capital Power on the last downtrend.

I always have the banks on my radar – the Bank of Montreal (TSX:BMO) looks like the best valued at the moment. I know you like DRIPping those bank shares!

Finally, I am also looking to increase my exposure to gold. Alamos Gold (TSX:AGI), Kirkland Gold (TSX:KL) and Franco Nevada (TSX:FNV) are all on my list. I bought a partial position in Alamos earlier this year and would love to get FNV around $160. Not sure if it will get there in this environment.

Those who ‘tuned in’ last time will know I also have a growth portfolio. Here, I am taking a hard look at REAL Matters (TSX:REAL). Despite the big run-up, it has some impressive expected growth rates.

Great stuff Mat and thanks again for this. I enjoy reading your analysis and takes on various sites.

Folks, what do you do or how to you react when your stocks cut their dividends?  When do you sell a stock after a dividend cut?

Mat and I look forward to your feedback on this article, and your thoughts. Share them below.

Mark

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Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.