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.

Stress

I reacted to a dividend cut many years ago after it announced a 50% dividend reduction. I sold that stock and never looked back.

Should you do the same?

In recent weeks I’ve incurred dividend cuts from Inter Pipeline (IPL) (72% cut), Suncor (SU) (55% cut), and H&R REIT (HR.UN) (50% cut). This has not been kind to growing my dividend income as fast as I would have liked but at the end of the day, I’m thinking such setbacks are temporary. These companies will thrive again.

I have my reasons for not selling these particular companies even after a dividend cut, but no two investors are the same either.

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. 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 happen to own a few hundred shares of BPY and I think it’s at risk for a dividend cut this summer. I don’t want to see that obviously. 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. If fact, I’m DRIPping multiple shares of each every quarter free of charge.

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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My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, we're very close to realizing two major money goals: owning a 7-figure+ investment portfolio along with no debt to start semi-retirement with. Find out how we did it, what's next, and what you can learn from me to tailor your own financial independence path. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

30 Responses to "When to sell a stock after a dividend cut"

  1. Hey Mark,

    Great interview and I appreciate Mat’s take on dividends. It’s been a tough economic environment ever since Covid 19 hit. I’ve had to adjust (lower) my own dividend forecast for the year due to all the cuts and suspensions.

    DG Capital

    Reply
  2. Like you I also hold H&R REIT, 450 shares. Mainly I’m a dividend investor and that’s the only stock to take a hit. But the stock value dropped over 50% so I don’t want to sell at a loss. I’m pretty much set it & forget it but I’m keeping an eye on H&R. I’m in no hurry to sell, I can ride it out, but once that stock comes back to where I bought in, if the dividend is still cut, I’ll sell them. Hopefully that won’t take years and years! I think that’s more my strategy of “when to sell a stock after a dividend cut”. Not sell at a loss.

    Reply
    1. I think H&R will come back but it might take some time. I’m OK to hold for now. I prefer not selling at any loss unless I can offset those losses for some major capital gains. Not the case for that company right now for me!

      Reply
    2. Hi Cheryl,

      In this environment it is very different. Some will bounce back quickly once the economy re-opens others won’t. Guess it depends on your take on H&R. If you are confident they will rebound (I know many are) then there is no harm in holding.

      Mat

      Reply
  3. This is the EXACT post I needed to read right now. So far only one of my 10 or so dividend growers cut their payouts (Westrock, WRK in the US, 75%) and I got out. I can see now how it’s not so simple and I should be a little more flexible with this rule of mine (it any of the others make cuts). Thanks for this!

    Reply
    1. Hi Matt,

      Glad you enjoyed it – it is one thing I have learnt over the years. Although it is good to have rules, there are always exceptional circumstances and we are definitely faced with that today.

      Best of luck!

      Mat (with one T)

      Reply
  4. Loved this post and it is very timely. I am happy to say that I have both of your favorite stock picks and increased my position both in Algonquin Power and Fortis just recently. Got rid of my only REIT and keeping my portfolio pretty much as is. Lower dividends are a disappointment not a problem for me as long as I believe in the company. As Buffet says buy them and keep them if you think it is a solid company. None of us can predict the future, let’s be patient and not too greedy and this too shall pass.
    Stay well, stay safe
    Mary Lynn

    Reply
    1. This too shall pass although certainly quite the shock to the market system!

      Being patient and not too greedy are good investors traits.

      Stay well!

      Reply
  5. Good to see Mat on your site again. My comment concerns some of the stocks mentioned, but it is not about dividend cuts specifically. I have owned FTS a good many years, but really its performance has been mediocre at best, and its dividend, though reliable, is good but is no screaming deal in today’s market. Yet there it sits, in everybody’s list of favourites, even yours! I have seen but one analyst to say SELL in the past few months. I have switched to AQN for its better performance and higher dividend. Perhaps I will get FTS again to broader my exposure to that sector, but the price has to go down first.

    I too own BPY.un, again on high hopes of others, but it really seems to be directly in the track of the next COVID tornado. A worthy prospect to SELL.

    Reply
    1. I also think that Fortis is a great stock to hold, especially in times like this. We look at utility stocks in our portfolio like fixed income. They don’t raise their dividends as much and the yield may be lower, but much less likely to cut. Study income for the long term. I bought Fortis in 2008 and have a 112% total gain on it, including dividends.
      Emera is another one that I believe should be in every dividend income portfolio. Held since 2007, total return 168%.
      Good post Mark.

      Reply
    2. Agree with most comments here on Fortis. Over the past 10 years, Fortis has a compound annual growth rate of 10.3% (once dividends are included). That is nothing to be disappointed in and it has crushed the TSX over the same period. I have more than doubled by investment in Fortis and thinks its a great long term hold.

      However, as I mentioned in my response to Mark, I’d probably chose AQN over FTS today as its cheaper, and has higher expected growth rates. Regardless, both are excellent.

      Mat

      Reply
      1. Happy to hold both and DRIP both Mat, re: I obtain a few AQN and FTS shares each quarter and will continue to DRIP synthetically until I need the cash!
        Mark

        Reply
  6. Wow, I see from Mat’s Google spreadsheet that you can have quotes automatically updated in a spreadsheet – that is so sweet! (see column K) I tried this myself and it worked!
    Best thing I’ve learned all week and it’s only Monday morning haha

    Reply
    1. Haha – Google Sheets is pretty great for that. I use it all the time. Feel free to make a copy of it, or tailor it to your needs.

      Mat

      Reply
  7. Great post at the right time. Sometimes you just want to bury your head in the sand. As a retired person living off dividends, it’s hard to swallow when your income cash gets reduced. Thank goodness for being diversified. For myself, I’ll let it ride and watch. If I must, I’ll take a loss and put whatever is left into a solid bluechip (like one listed above). Better that then hoping for a loser to eventually come back and maybe return to a previous dividend.

    Reply
    1. Thanks Paul.

      “Thank goodness for being diversified.”

      Yup. I have my May dividend income report coming out soon and thankfully, those 3 dividend cuts have been very minimal.

      We’ll see what my future holds!
      Mark

      Reply
    2. That is the right call Paul. There are some that will bounce back quickly – others won’t. Hold on to those that should come out the other side just fine, but also no harm in dropping those where the investment thesis has changed (for the worse). You can’t go wrong in swapping those with an unfavourable outlook for blue chips.

      All the best,

      Mat

      Reply
    1. Really enjoyed this topic Mark. Keep it up! Still deciding ourselves what to do with our cash since sale of the house. Right now I’m happy sitting in cash but I will be looking into some of the gold holding discussed by Matt. Unfortunately it has become difficult and more expensive to buy physical gold.

      Marc

      Reply
      1. Are you thinking about a gold ETF Marc? HGY? I recall the panel at MoneySense liked it.

        I don’t own any myself – just straight up common stocks and ETFs and some cash.

        Are you moving?
        Mark

        Reply
  8. Hi Mark, Thanks for all the information, these are certainly difficult times. However, I do have money in my TFSA to invest and have been reading all your past posts on investing options around TFSAs. I would like to get some US/International exposure with minimum withholding tax for a more balanced approach. In light of today’s market, I would value your comments on if you still recommend the same ETFs, such as XAW or VXC, or would you stick with buying quality Canadian stocks? Thanks, Nancy

    Reply
    1. I know a lot of investors that put low-cost CDN ETFs that hold U.S. assets inside their TFSA and RRSP for extra diversification.

      Many investors I know use VXC, XAW for ex-Canada diversification and also XUU for low-cost U.S. diversification.

      Sure, there are some withholding taxes, maybe ~ 0.30% withholding tax drag but if you have a long-term time horizon of 10-20 years and want diversification I personally don’t think it’s a bad move at all. I wouldn’t let withholding taxes drive all asset decision-making.

      Here is an article for you to consider!
      https://www.myownadvisor.ca/how-to-diversify-my-tfsa-using-etfs/

      All the best,
      Mark

      Reply

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