One of the reasons that many people sell dividend paying stocks is because the company decided to cut its dividend. However, immediately selling a dividend cutter may not always be the best choice. In some cases, the cut might be temporary. Before you give up on a dividend stock, consider the circumstances surrounding the cut, and make sure that you are really sure that selling is the best option.
Will You Be Taking a Big Capital Loss?
Sometimes, a dividend is cut because of tough economic times, or because of some other external issue. If you sell in the middle of a market drop, you could very well be taking on a huge capital loss. In some cases, selling in order to harvest a loss for tax purposes might be worth it – as long as you do so after some careful thought.
However, in some cases dividend cuts are temporary. There is a chance that dividends will be raised again after market conditions stabilize. Many companies go through dividend cuts, and then raise them against later. You will need to decide whether or not you think the dividend cut is a symptom of a fundamental problem, or a defensive response to difficult times.
If you think that the stock will recover, and that dividends will be reinstated, don’t be too hasty in selling the stock. You don’t want to take a large capital loss on top of the loss of the dividend income.
Evaluate the Fundamentals
Of course, not every company cuts dividends during difficult times. Dividend aristocrats show consistency in raising dividends – even during times of economic recession. When considering which stocks to add to your portfolio, it can help to look at the fundamentals of the company. The management, balance sheet, cash reserves, and other items can be assessed in order to determine whether or not the company is still solid.
Deciding to Sell
It is difficult to decide to sell any investment, including a dividend stock. However, you do need to do what’s best for your portfolio. In some cases, investors choose to wait and see if a dividend will be reinstated, or at least wait to see if the stock price rises again in order to reduce some of the capital losses that come with selling.
Another indicator that it might be time to sell is if the company has cut the dividend several times in a row. A cut, and then holding steady, might not mean that a long term problem is on the way. However, several cuts in successive quarters, or the elimination of the dividend altogether, might give someone pause.
Ultimately, it’s up to you to decide what is going to work best in your portfolio, as well as whether you think it’s time to sell a dividend stock. Consider your position, and consider whether you think that the dividend stock will recover.