In a recent post, I wrote about how I had altered my investing code to reflect that I would now be selling dividend stocks soon after a dividend cut. This is quite a departure for me as I traditionally had not sold stocks very often. However, given my primary objective to generate a reliable and growing stream of income from dividend stocks, stocks that cut their dividends do not allow me to achieve this goal and something must be done about it.
There are really only two things that a dividend investor can do after a dividend cut. The first is to hold on to the stock and wait (hope) for the stock to recover and the dividend increases to continue. This can take years and may in fact never happen. The second thing an investor can do is to sell the offending company and invest the proceeds in another company that is growing dividends at a fast and high growth rate. This second option is the one that I have decided to go with and have recently acted on this through the sale of two stocks within my portfolio.
It will come as no surprise to dividend investors that the stocks I decided to cull were Bank of America and Citigroup. Both of these stocks have had to enact dividend cuts in order to survive which is not a good situation to be in. Both of these companies are on shaky ground, with Citigroup worse off than the other. This poor management and poor performance has no place in my dividend growth portfolio and I am happy to get rid of them.
I have learned from this experience. A buy and hold philosophy, which I still strongly believe in, does not mean that an investor will never sell. The whole premise of the buy and hold is to ensure that you hold the best stocks and let them run. It does not mean that you buy the stock and forget about it through thick and thin. Crappy stocks can really drag down a portfolio and holding them can be disastrous so it is prudent to get rid of them. If you want to be a true buy and hold investor, then index funds are the way to go. With individual stocks tough decisions must be made.
Where the proceeds ended up will be the topic of a follow-up post. Stay tuned…