When to Sell a Dividend Stock

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One of the hardest decisions a dividend growth investor must make is knowing when to sell a dividend stock.

I have run into this issue on multiple occasions with companies in my dividend stock portfolio.

As investors, it can be difficult accepting it is time to cut the losing stocks from your portfolio. I believe it is much simpler to figure out when to buy a dividend stock compared to selling one.

It can be emotional. Nobody likes to lose.

But when you pick a dividend stock that just didn’t work out, you must come to the realization that your selection was a loser and move on.

Every dividend investor is different, but if you are going to be successful … you must have an exit plan.

Today … I am going to briefly discuss the 3 different actions you need to take for your dividend portfolio – buy, hold, and sell.

Then I will follow up by showing you the most important action of the 3 … my exit plan of when to sell dividend stocks.

Buy, Sell, Hold Dividend Stock Analysis

My wife and I started to build our dividend income stream back in 2008. That first year we earned $29.46 by owning a single dividend stock – Consolidated Edison (ED).

This was a successful investment and one of those stocks to buy and hold forever (in our opinion).

It was part of a solid foundation to our portfolio that we started building over a decade ago. The company has consistently raised it’s dividend now for 47+ years … which is incredible.

We followed our first purchase up the next year with several other quality dividend paying stocks. These foundational dividend stocks included some well known names like – Johnson & Johnson (JNJ), McDonald’s (MCD), and Procter & Gamble (PG).

All of those companies mentioned are still part of our portfolio today.

We purchased all of these companies by using our rule for selecting dividend stocks to buy.

Note – Even today (a decade later) we are tweaking our rules to BUY dividend stocks.

Some of those stocks I mentioned (as well as others), we are still actively buying new shares today. These are considered BUY stocks for our portfolio right now.

There are other stocks we own that we are not buying nor selling. These companies are in our HOLD category.

This brings me to the final (and most important) rule … the dividend stocks that we need to SELL.

When to Sell Dividend Stocks

I could sit here all day and tell you about all of our “winners”.

But just know … there were some “losers” too we added to our portfolio.

There are not a ton of them … hopefully because we did such a great job of picking these companies in the first place.

The two companies that come to mind that didn’t perform well in our dividend picks were – ConocoPhillips (COP) and BHP Group (BHP).

After purchasing both of the companies and holding them … we realized they had some issues and ended up selling all our shares of both.

They were sold because at some point in time … both companies cut their dividend while we owned shares … which WAS our #1 reason (and trigger) to sell a dividend stock.

Over the years we have tweaked this rule … including in 2020 during the pandemic.

Below you will find the rules for selling a dividend stock in our portfolio.

Investing Rules – When to Sell a Dividend Stock

Just like I have rules for selecting dividend stocks to buy, I have rules on when to dump a stock too. These rules allow us to build a sustainable source of income through dividends by owning shares of top notch companies.

Up until recently, we had one simple (easy to remember) rule for selling a dividend stock which was –

OLD RULE – When a company cuts it’s dividend, then SELL the stock.

In the past … this rule worked out great … until it didn’t.

Now, I take it on a case by case basis. And in some instances, I may decide to sell a stock … even if it doesn’t make a dividend cut.

I have broken down my steps for how to sell dividend stocks below –

Step #1 – Watch for Dividend Cuts

I would say 9 times out of 10 … if a company cuts their dividend, I am going to end up selling the stock.

That scenario played out years ago with our COP and BHP shares. Those stocks should have been sold as they were losers in my portfolio.

But where the rule came back to hurt was in the spring of 2020 when Disney (DIS) cut their dividend … due to the pandemic. While I didn’t have a huge position in the company, I followed my rule and sold all our shares immediately after the cut.

Looking back … I probably should have investigated more into the numbers behind the business. Who knows … maybe I would have still sold? But the company seems to have weathered the storm and will likely reinstate their dividend in the future.

That is why I don’t want to immediately sell in this scenario.

And in my opinion … a stock that may cut it’s dividend in the future, should be showing signs of it before hand.

Which leads me to step #2.

Step #2 – Watch for Slowing Dividend Growth

Slowing dividend growth is easy to spot.

For example, a company could be cruising along for years averaging 5% to 7% dividend growth … with growing revenue and earnings to back it up. But then one day they slowing start cutting into earnings to keep paying that dividend increase.

Then the company starts slowing down their growth year after year … until they eventually are forced to start cutting back on their dividend. That is a company I don’t want to own.

So in this step, I am not looking for companies that have cut their dividend but rather –

  • have a rising payout ratio
  • revenue is slowing
  • earnings are slowing

All these factors lead to dividend growth slowing and possible cuts.

These are in my HOLD and watch group.

Step #3 – SELL or HOLD

Now that we have been monitoring our stocks for a bit of time … the decision will eventual come to either sell the stock or hold it and keep monitoring.

In the case of my COP and BHP shares … it made sense to SELL, which is what I did. The funds raised from the sale were simply reinvested back into better options for my portfolio.

For my Disney shares … I may still be holding them today if I would have looked more into the business.

And there are plenty of companies in my portfolio right now that are just simply a HOLD for me … that I am watching closely now. As dividend growth slows, I want to make sure I am not caught off guard with a future dividend cut.

So these companies could become a sell if the numbers don’t look promising.

Selling Losers is Critical to Your Success

Most successful dividend investors follow a set of criteria to select stocks to buy.

Without a good set of rules and guidelines in place, investors could be throwing their money away chasing high yielding stocks.

As is the case with selecting stocks to buy, it is just as important to know when to hold a dividend stock … and when to sell a dividend stock.

Taking action when it is time to dump a dividend stock will help weed out the losers in your portfolio so more attention can be put on the winners.

I know that it can be hard to sell a dividend stock … but trust me … it is worth it in the long run for the overall performance of your portfolio.

Have you ever found it difficult to dump a stock after a dividend cut or for any other reason?

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