Wednesday, August 9, 2017

When A Stock Fails To Raise Its Dividend: Is It Time To Sell?

I hate to sell a dividend growth stock. When I buy a stock, my intention is to hold it forever and enjoy its ever-growing dividend income. Unfortunately, it doesn't always work that way. Sometimes things change and the stock no longer fits my criteria for inclusion in my income portfolio.

It could be a company that cuts its dividend or in some cases freezes its dividend (fails to raise its dividend at the appointed time).  Let's take a look at a two-step process designed to help us determine if we should sell a stock after a dividend freeze.

I. Does The Stock Still Meet Our Investment Criteria?

Investing in dividend growth stocks is about building a reliable income stream that increases each year. When an investment stops raising its dividend, it is no longer providing the future income growth required by my dividend growth portfolio. The stock may still be a good value, but my dividend portfolio’s primary objective is an ever-increasing dividend income, not capital gains.

Obviously, the company's future prospects would play into a decision to keep or sell. Can the company raise its dividend, albeit late, and still preserve a year-over-year increase? Will the future earnings provide sufficient free cash flow to pay a dividend? What other obligations, such as debt, might absorb future cash flows? Is management committed to growing the dividend? Would you buy this stock today as an income investment? This step determines if the stock is a candidate for a sale. The next step asks the critical question...

II. Are There Better Alternatives Available?

Once the stock has been identified as a candidate for a sale, the question then becomes is there something out there that is better? Don't forget in determining the market value of a stock, the market considers any known "bad news" about a company. So after the bad news is out and the company freezes the dividend, the price may drop and increase the effective yield on the stock. Yield on cost is not relevant when considering a sale.

The current price and current yield are what you will receive and give up when selling a stock. With the cash received is there another stock that would be an "upgrade" from the one you are selling? What does its future prospects look like? Will the new stock replace the dividend income lost from the one sold? What does its debt and cash flow look like? Will it continue to grow its dividend in the future? Is it a more riskier stock?

If in answering these questions you determine the stock should be sold, then you pass step two. At this point, you should sell the stock that failed to raise its dividend and purchase the one you identified in step two.

Full Disclosure: No position in the aforementioned securities. See a list of all my Dividend Growth Portfolio holdings here.

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