3 Rules for Investing in Dividend Stocks

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I am writing this as I sit at home following social distancing best practices as a result of the COVID-19 pandemic. Hopefully, when I look back a year or two from now … we all will be in a much better place.

For the purposes of this blog (The Money Sprout), I will leave all of the health and political topics to others. Just know that this pandemic is no joke and lots of people are dying across the world. And at the same time … the world economy has basically shut down to help slow the spread of the disease.

So while I don’t plan on discussing my views on staying healthy during this pandemic or my feelings about what the governments should be doing … I will continue to discuss personal finances.

I invested and survived through the 2008 (and beyond) financial crisis … and I plan to do the same this time around. However, things feel different this time around compared to 2008 … although I am sure I felt that way back then too.

That being said … today I would like to share my views on managing and growing our dividend income portfolio during this turbulent time.

I thought it would be good to review the rules my wife and I have put into place on how to build our dividend portfolio of stocks.

Dividend Income Stocks – Rules to Build a Portfolio

Since our dividend income portfolio is made up mostly of individual stocks, we need to be extra cautious on how we are building our portfolio.

For example … chasing the highest yielding stocks may seem like a great strategy … but it could be a disaster waiting to happen. A super high yield could be a huge red flag when buying a dividend stock.

These rules for building a dividend income portfolio don’t just apply to purchasing stocks either. We need to have clear and defined rules on when to sell a stock too.

And don’t forget about when to hold and stay the course on a particular stock in your portfolio.

Based on the current market situation, I thought it would be a good idea to review my rules on when to – BUY, SELL, and HOLD a dividend stock.

And if I decide to tweak these rules, I will be sure to update this post.

1 – When to BUY a Dividend Stock

For further details on our criteria to BUY a dividend stock, check out Selecting the Best Dividend Stocks.

The criteria we have focuses on picking the best blue chip companies with the following characteristics –

  • Long Dividend History
  • Low Payout Ratio
  • Low P/E Ratio
  • Moderate Yield
  • Consistent Dividend Growth Rate

I didn’t offer specifics on the exact criteria we choose to pick dividend stocks to buy as it can change. However … those are some basics we look for when picking out stocks to add to our portfolio.

Note – We also continue to reinvest our dividend income sometimes through dividend reinvestment depending on the stock.

2 – When to SELL a Dividend Stock

This is possibly the most important rule of all when building a dividend income portfolio – when to sell.

It’s easy to define your criteria on when to sell a stock … but it is much harder to act on it when the time comes. Trust me … I know.

I’ve sold a few dividend stocks over the years, but I will admit it wasn’t easy. The most notable sells were BHP Billiton (BHP) and ConocoPhillips (COP). Instead of selling the shares we owned (once our SELL criteria was met), we held onto them longer than what I would have liked.

So what is our criteria to SELL?

For our dividend stock portfolio, if a company announces a dividend cut … then we are to immediately sell all the shares we own.

Years ago when faced with this situation, I ended up holding onto our shares of BHP and COP when they cut their dividends. After a few months, I finally realized it was time to sell them off.

We haven’t been faced with a situation like this in well over 5 years. However, I fully expect a company or two in our portfolio will end up cutting their dividend within the next 12 months.

If a company ends up cutting their dividend, then I need to stick to the guidelines we have in place to sell our shares.

3 – When to HOLD a Dividend Stock

It’s hard to watch the value of our portfolio drop like a rock. But the same thing happend in 2008 and we kept investing. And that is what we plan to continue doing now.

During this latest economic crisis, we most likely will just stay the course and HOLD most of our dividend stocks. This means that if a company we own continues to pay a dividend at the same rate (or higher) we will keep them in our portfolio.

Of course, we’d still love for these companies to keep increasing their dividends annually … but if they just maintain … then we will do the same.

A good example of this are shares of CVS Health Corp (CVS) that we purchased a few years ago. The company has been going through a lot in recent years and decided to keep their dividend the same.

This means no annual raises … but the company has maintained their dividend … which means we will continue to HOLD our current shares. It also means we won’t purchase any new shares however since they are not growing the dividend as we’d like.

To summarize … stocks already in our portfolio who maintain their dividend will NOT be sold.

However, we will keep a careful watch for any dividend cuts … which will trigger our SELL guideline previously discussed.

Of course, our plan is not just to HOLD our stocks but rather continue reinvesting dividend income and investing new funds into additional dividend stocks.

Stay the Course and Stay Safe!

Of course … the most important thing right now is to stay safe and healthy.

Talking about personal finances and dividend stocks isn’t the most pressing issue in the world right now. I know that my priorities are to follow the government guidelines and stay at home. My wife and I plan to continue following physical distancing and doing everything we can to keep our family safe.

Eating healthy, getting outside, exercising, and spending time together as a family are all at the top of the list for us for some time.

And when it comes to the stock market and our investments … I’m sure it will all work itself eventually. In the event of a dividend cut … we will certainly follow through this time and sell shares of the stock.

What is your investment strategy during this market downturn? Are you staying the course or changing your investment strategy?

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