Dividend investors are looking for solid companies that consistently grow their dividends. Last week Pfizer Inc. (PFE) cut its dividend by 50%, and as such is no longer suitable for my dividend portfolio. The quandary faced when selling a stock after a dividend cut is replacing the lost income without assuming undue risk. As with most stocks, PFE's price had declined over time and the stock was yielding over 7% prior to the dividend cut announcement. Immediately, after the announcement the stock dropped 7% and was only yielding around 4%. Fewer dollars are now available to replace income from the previous higher yield. So what do you do to replace this income without assuming unreasonable risk?
Fortunately, I had built up a risk reserve by purchasing lower risk stocks and trimming my positions in higher risk investments over the last several months. My portfolio was poised to take additional risk, but I limited the risk to the amount needed to replace the lost income. This was done in a two step process:
- With the cash received from the PFE sale, I purchased shares of Eli Lilly and Co (LLY) to help preserve my sector allocation. At the time, LLY was yielding slightly over 5% and was rated less risky than PFE prior to the announcement. This dividend income from this purchase fell well short of that lost from the PFE sale.
- With limited funds available, I had to assume additional risk to get yield needed to maintain the prior level of dividend income. To accomplish this, I opted to purchase a small block of CenturyTel Inc (CTL) yielding around 10%.
Tags: [CTL] [LLY] [PFE]