3 reasons to sell a dividend stock

Dividend stocks offer more than just share appreciation, and weighing when to sell is tricky ... so here are tips on when to sell.

By InvestorPlace Apr 9, 2010 7:17AM

pile of cash from dividend stocksDividend stocks have lots of appealing factors, and it’s easy to find reasons to buy. Some stocks have a great dividend yield. Others have a decades-long history of raising dividends once a year. Then there are picks with a modest dividend but great upside potential for shares.

 

If you’re looking for a reason to buy dividend stocks, there are plenty. But a trickier scenario is knowing when to get out. Here are some tips to help you pull the trigger:

The company cuts or altogether eliminates its dividend: This one is fairly obvious. You can sometimes stomach a company that keeps dividends flat for a few years. But if a company is slashing dividends, it means that the balance sheet has gotten so bad that it needs to literally take money out of shareholders’ pockets. The most likely scenario in this situation is that investors will be stung twice -- once with the cancellation of dividends and again as share prices suffer. Take General Electric (GE), which cut its dividend in February of 2009 and saw shares drop 10% the next day

The dividend stock sees its annual dividend yield drop below 1%: There are plenty of stocks out there that offer a nominal dividend -- even small-cap companies with lower volume and a comparatively small pool of profits to share. But if a company’s dividend is below 1%, chances are that it’s not a dividend stock. It’s just a stock that happens to offer a dividend. If a stock is truly in your portfolio because of its quarterly payout, you must demand more than a payout of just a few pennies per share. Besides, if dividends are an afterthought for companies than there’s no guarantee that they will make an effort to maintain or boost their payouts.

Your “yield on cost” for the specific stock is below 2%: Let’s say you bought shares of Home Depot (HD) in 2000 at their peak of around $60 a share. The current annualized dividend for HD is 95 cents a share -- meaning your yield based on the cost your paid is just 1.6%. Yes, Home Depot might be offering investors a dividend yield of 2.9% based on current valuations … but if you bought in at twice that than your personal “yield on cost” is dramatically different. Just as profits are relative depending when you bought in to a stock, so are dividend yields.

 

There are other key reasons to sell a dividend stock. But unless you're one of those investors who has a holding period of "forever" for these companies, there comes a time when you need to weigh the benefit of selling a dividend stock and moving into a better stock to protect your nest egg.

 

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