Ouch! What to do about dividend cuts?
Sad news when we hear that a stock that we own has cut its dividend. Or even worse, eliminated its dividend. Somehow it sounds like a fatal flaw for a dividend investor. Or is it? Time for some soul-searching…
In the normal course of events, when business is good, dividends don’t get cut. In fact, good times often cause dividend increases.
But stocks, and dividends don’t grow endlessly to the sky. When companies find their business has setbacks, dividends can be cut.
Our Dilemma
We find ourselves in a quandary when dividends are cut. Do we sell or hang on? Or do we buy more? If we have previously been using dividend reinvestment, do we switch to cash? Or is this a good time to initiate dividend reinvestment?
Like all important things in life, the answer is: “It depends.” I would not be surprised if multiple analysts give divergent answers on what might be the best course of action. In fact, it is easy to find articles online with opposing opinions about just about anything, isn’t it?
In many cases, a company can bounce back from adverse events, but sometimes it is the sign of terminal decline.
First Steps
Over time, even if a company is stable, there are some situations where I do not use dividend reinvestment. It may be difficult to quantify, but there are some companies that were at one time growing, but seemingly have stalled and do not show signs of positive movement. Not having a crystal ball I cannot say what their future holds, but in some of these cases, I do not look forward to more of the same. For these companies, I don’t usually concern myself with lost opportunity costs, and in addition I don’t relish capital gains taxes. I receive their dividends in cash.
That being said, the overwhelming majority of stock I hold have dividend reinvestment turned on. That way, my overall holdings grow organically even if I did no other outright purchases. But I do some dollar cost averaging for a select few. And then, as previously noted, when the market declines I keep a sharp eye on the prices of some equities: bargains are possible,
Search and Research
I have read articles positing that dividend-cutting companies more often than not rebound. Eventually. As we all know, eventually can be a long time. A company that cuts a dividend now has more income that it retains, and can rebuild its balance sheet. Sometimes that is all that is needed. On the other hand (and there always is another hand), the world is full of companies that imploded, and the first outward sign of trouble is a cut dividend. Despite all the unknowns, I would say the best course of action is to trust your gut.
Since it is impossible to know in advance the future of companies, the best we can do is an educated guess. That is why I say “trust your gut.” We make the best of wherever we are. While I would like to be right all the time and make all the best choices, the ‘all the time’ aspect is illusory. There is no test, no one will say that I failed the test. I diversify so as to not be painted into a corner. If it works out, great. If it does not work out, I have other options.
Cuts
I don’t sell upon dividend cuts. I would never say never, but I don’t sell upon dividend cuts. Other people may disagree as to the best course of action. I would say that in many cases, sooner or later a dividend-cutting company bounces back. Some don’t, many do. In the end, as long as the company is still alive and paying dividends, I still am collecting those dividends, albeit at a reduced rate.
How do you react to a dividend cut? Let me know here.
The Japanese print displayed, titled “A youth is shown in a house making offerings before a figure of Ebisu, and outside seven boys are blowing soap bubbles. Ebisu-ko – The Festival of Ebisu (Provider of Daily Food)”, by Toyomasa Ishikawa, 1770. Courtesy New York Public Library.
The post Dividend Cuts appeared first in Smile If You Dare.