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Frequent Contributor

How do you handle dividend cuts?

Curious as to how others have handled dividend cuts? In the past, my policy has “typically” been to sell a stock when it cuts its dividend. I have occasionally held when the dividend cut seemed to make sense, such as PFE when they bought Wyeth, or two of our banks in 2009- USB and WFC. But generally I sell!

Now, I have three that have cut or halted their dividends- HSBC, WY, and RDS.A. HSBC was “ordered” to stop paying their dividend by govt., WY has dropped it due to a big slowdown in business, and RDS.A also cut due to the oil market dropping so much. 

Curious as to how others are approaching these situations?

 

Win
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5 Replies
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Explorer ○○

Re: How do you handle dividend cuts?

I think it depends on if you want income or long term investment. Depends also on the company if there is trouble might be time to bail or if there is a solid company protecting itself by reducing cash going out then i might buy more! All depends on the company and what your objectives are. 

I actually bought some stocks that cut dividends recently.

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Participant ○○

Re: How do you handle dividend cuts?

It depends. A stock like Cracker B. (CBRL) that froze their dividend I will hold.  IMO I think you have to ask yourself what  is causing the cut and go from there! :)

Copie

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Participant ○○

Re: How do you handle dividend cuts?

Under normal circumstances, I sell a stock when it cuts the dividend.  No circumstances are normal right now!  

I decided to continue to hold RDS.B after it cut (I am anticipating the dividend will be restored when it makes sense), but I will evaluate each stock as it happens.

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Participant ○○○

Re: How do you handle dividend cuts?

@Win1177  My approach to dividend cuts is to first try to anticipate and avoid them using Josh Peter's Dividend Drill in addition to ordinary analysis of the business, financials, and qualitative factors.  

1.  Is it safe?

2.  Will it grow?

3.  What's the total return profile?

If deteriorating fundamentals indicate substantial probability of future cash flow and/or business problems, I try to sell before the stock price anticipates the dividend cut by falling substantially to price it in.  Admittedly, this is a lot of work, involves judgment, and it isn't infallible, but it has kept me out of a lot of trouble.  

Once a dividend cut happens, it's a different story.  You need to ask yourself if you think it's a high quality business that is likely to quickly bounce back or if the business is permanently impaired, and also what is priced in.  Unless trading at a substantial discount to the then current fair value, if permanently impaired, my tendency would be to sell.  Available alternatives also can play into the calculus.

Other factors matter as well.  How big is your position size?  Do you need the income to meet your goals or is it excess to your needs and therefore just a nice to have, and otherwise how do you feel about the business's recovery potential and quality going forward?

Since the kind of analysis I do requires a lot of effort and I can't really know 50 companies well, I focus on a smaller number of companies I try to know and analyze quite well.  And then I'll add in some broader ETF and sector fund type exposure.

Although I suppose owning a bunch of companies at a 1% position size, or mixed in with broader fund or ETF allocations could also make some sense. 

I'll add that I think I remember reading in the Closed End Fund discussions, some of the folks in the know seemed to think selling immediately after a distribution cut announcement, but before the news has filtered down to the mostly retail holders, might make sense because of more of a delay between news and price declines.  

Good luck.

 

 

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Frequent Contributor

Re: How do you handle dividend cuts?

If I catch it early enough .... In most cases I will immediately sell.

The cut is a symptom of a larger problem, and price nearly always tanks after a cut. Get out of the way, and make your decision to buy it back at a lower price after the circumstance becomes clear.

This market is different. It does not seem to be responding to bad news.

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