Should I Sell If A Stock Cuts Its Dividend?

15th Nov '24 by Mark Simpson

23 comments 1620 reads

Dividend strategies are popular amongst UK investors. The ability to receive a market-beating passive income from simply holding large, steady companies is incredibly attractive to those who use their stock portfolio to help with living expenses. There is evidence that this kind of Value strategy beats the market over the very long term, although perhaps by less than other value strategies.

Towards the end of 2022, I wrote an article proposing a Value-first strategy. I suggested investors would be better off screening for stocks that meet Value criteria first and then picking a diversified collection of the highest-yielding stocks out of these. However, when I reviewed this strategy in 2023, the results were a little disappointing. What I called the “Safer Income Portfolio” beat some other simple value strategies. However, it underperformed the FTSE All Share, at least on price-performance:

More disappointingly, the portfolio contained four companies that cancelled their dividend payout:

And some that cut their dividend while not completely cancelling it:

It seems that this income portfolio was not safe enough, and in my mea culpa, I concluded that:

…the riskiest holdings have done the real damage. These stocks clearly had significant political risks when the portfolio was formed...It can be tempting to “juice” the income portfolio with high-yielding but risky or under-diversified stocks. With the benefit of hindsight, I would have picked much more stable businesses from these industry sectors.

However, fast forward another year, the “Safer Income Portfolio” has recovered its underperformance:

Although the dividend cuts hurt the income, it still delivered a 4.8% TTM dividend yield, meaning that the two-year performance of the strategy appears to have slightly outperformed the wider market on a Total Return basis. This is despite a few more shares joining the dividend cutters, such as EKF Diagnostics Holdings (LON:EKF) , Spirent Communications (LON:SPT) and Headlam (LON:HEAD) .

This leads to an interesting question:

Should I sell if an income stock cuts or cancels its dividend?

Many income strategies simply sell if a dividend is cancelled and reinvest the proceeds elsewhere. The logic seems sound. If investors are relying on that income and…

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Epitychia

16th Nov '24

Not sure where i saw this but a rule of thumb is to select high dividend yields up to 7%. Those yielding more than 7% are companies in trouble that are very likely to sharply cut their dividend. One way to distinguish between cash cows and value traps.

Rusty2

I have seen that also, think it was on here.

l don't agree that all over 7% payers are in trouble, a lot in the insurance sector, are paying high dividends. They don't seem to be in trouble. I hold number of them, such as Aviva (LON:AV.) Legal & General (LON:LGEN) Chesnara (LON:CSN) and Phoenix group (LON:PHNX).

WimborneMiser

It's certainly one of my red flags for getting out, along with profit warnings, downgrades and share buybacks (don't like them, rather see an increase in the dividend). Trailing stop loss, but that is my Achilles heel "give it another week" and then it's heading north of my 15% limit

So you would sell all your US large caps because of buybacks?

17th Nov '24

I don't own any US large cap stocks or UK ones for that matter

Really.

But believe you own LBG Media (LON:LBG) that does buybacks and pays no dividends.

I'm not aware that LBG are buying back shares, I've not seen any RNS update on this. When was this?

ken mitchell

That above 7% yield a dividend cut is likely advice no longer applies. There are plenty of shares and Investment Trusts paying over 7% where the dividends are being held and quite often increased. It’s partly a reflection of how undervalued so many UK shares are.

It’s well worth you reading the posts including mine where I listed 13 shares and Trusts paying big dividends with most if not all of them looking safe and some increasing their already big dividends each year. Obviously that’s with the proviso that any share including shares not paying dividends can be hit by unexpected bad news.

Here’s the link for that dividend thread. My post followed by some good replies was on 14th November:-

https://www.stockopedia.com/co...

I excluded shares paying even bigger dividends where a cut is quite likely, but even then not certain .

Liontrust Asset Management (LON:LIO) dividend is 16%. Their Results are this Thursday, so we’ll know whether there’s a cut.

Polar Capital Holdings (LON:POLR) was included in my post on the other thread. They report tomorrow. 9% dividend and good chance it will be held. It will be interesting to read any comment they make on future dividends. (It’s always worth checking out what Conpanies and InvestmentbTrusts say in their updates about future dividends).

Serica Energy (LON:SQZ) share price has been hammered by the UK no more North Sea projects policy. It pays 17%. Even if they halve the dividend it would be above that 7% “it’s in danger of a cut” warning that used to apply.

Also NextEnergy Solar Fund (LON:NESF) an investment Trust paying 12% report on Thursday. A cut is possible.

I hold all these.

Sorry, l had the wrong LBG stock. Not keen the share options though.

Brucie5

Really interesting thread. My folio currently yields on paper at least, just over 10%, which is historically improbable. Dividends over 10% currently include VSL - a mistake; but as to SQZ, LIO, SBLK, GSF, NESF, MNG, among others, am I wrong or is the market mispricing..? Wealth managers, insurers and infrastructure REITs seem to be decidedly out of favour; yet this may prove to be a version of any other trend, including Y2K when you could lick up Value and Income It yielding 9% on basis that that noone wanted Old Economy stocks. Three years later boot was on the other foot! I vowed at the time that if I could ever build up and then exchange capital for income sufficient ent to live on, I should then do it.

Might also be worth flagging some of the best screens for identifying high yield shares which are likely to sustain payouts. I noticed for example the David Dreman one here, since it holds three of my stocks, ASHM, CAML & POLR. from a universe of just six. Apart from Billington, which is by most accounts a very good business, passing no fewer than 12 positive screens, the other two rather high risk.

Stockopedia | David Dreman High Dividend Screen Stock Screen

18th Nov '24

Following up my reply to Epitychia and his reminder of the days when 7% or above dividend was a big warning sign, today Polar Capital Holdings (LON:POLR) have issued their Results. They are good with AUM up again by 4% to £22.7 billion and with net inflows too.

The headline bit included “a positive outlook for the business,” and “interim dividend maintained at 14p.”

Here’s their small section on the dividend:-

“The Board has declared an interim dividend of 14.0p to be paid in January 2025 (January 2024: 14.0p). Maintaining last year's first interim dividend of 14.0p represents a covered dividend that is 68% of first half adjusted diluted core EPS compared to the prior comparable period when the dividend represented 81% of adjusted diluted core EPS. This reflects the improving results and our confidence in the business and the strength of our balance sheet.”

This suggests a high chance that the 32p final dividend will also be maintained as long as no new shocks to hit the markets. So that 46p dividend gives a yield near to 9%.

So much for that old 7% warning!

Liontrust Asset Management (LON:LIO) another Fund Manager report on Thursday. The share price fall has priced in disappointing Results. Has the fall been overdone? Will they hold the huge dividend? Or will the results be even worse than already priced in.? We’ll soon know. I hold …..at a loss even with the big dividends.

Graham Neary will be covering the Polar Capital Holdings (LON:POLR) Results on the Daily Stock Market Report thread.

So TFG have now taken up to just over 11% of Liontrust Asset Management (LON:LIO) which must be top of the list for unsustainable dividends. Or so many of us were thinking, as we wonder whether to sell our losses, or merely hold. But add...? TFG have another view, clearly? I also notice some speculation on LSE as to whether this is a CFD long position, in which case their move still more counterintuitive given a dividend at 16.4% screaming "cut me!"

TFG ASSET MANAGEMENT UK DISCLOSES ABOUT 11.5% STAKE IN LIONTRUST ASSET MANAGEMENT AS AT NOV 14 VERSUS PRIOR STAKE OF ABOUT 5.1% - FILING

Mark Simpson

Thank. 1MCF. With Value stocks I'm not sure there is an optimal time to hold. All the academic literature has a 1-yr holding period, which is when EPS declines and bottoms, but the multiple expands significantly (on average), anticipating the rebound, which is where the returns come from. My personal view is that longer is better, well into the period that sees EPS tend to recover and further multiple re-rating, but that has more to do with minimising costs rather than better raw returns. The data seems to point to anything from 1-4 years being ok, but no longer, and probably no shorter. However, I don't think I can say that four is "optimal".

HTH,

Mark

Hi doug,

It would be interesting to see longer, but that would decrease the number of stocks in the data set for later years, so it may well be noisy.

But I was not setting out to develop an optimal quant strategy; I was merely answering the question of whether I would tend to do better by selling if a stock in my portfolio if it cuts or cancels its dividend. And there appears to be a clear answer from this data —yes, if it is a cut, and no, if it is a cancellation.

I think if you make a 5-15% excess return holding for a year after a cancellation or save 5% further losses by selling a cutter, on average, then that is a success regardless of any subsequent price action.

Cheers,

FREng

20th Nov '24

Thats a really useful article, Mark (though thin coloured lines are a challenge to identify for those of us with defective colour vision!).

What about dividend cover? iDoes the data show a level of cover that significantly reduces the risk of a cut or cancellation – or conversely, a level of cover that should be an early warning?

21st Nov '24

So in the case of Liontrust Asset Management (LON:LIO) this has become a "What to do if the management DON'T cut the dividend", albeit the dividend is uncovered. And further to which there is some significant director buying on release of today's results (60+40+50k shares) following Monday's disclosure of 11% holding by TFG. Is this a. a bluff b. a deep value call; or c. just a bet on good odds that the worst is now past?

I hold at 29% down.

Tommy H

Hi Rusty,

I hold all the above in various family member portfolio's, the only questions I have is about Chesnara (LON:CSN) and Phoenix group (LON:PHNX) where the dividend is not covered on the simple screen.

Legal & General (LON:LGEN) goes back to 1.0 cover next year if they hit targets

Aviva (LON:AV.) is the lower at nearly 8% but this is covered.

Any thoughts?

Tommy

Hi Brucie5, I share your pain on VPC Specialty Lending Investments (LON:VSL) having sold with a manual stop loss I got tempted back bottom fishing and obviously have sold again on the next manual stop loss, it has not gone back on the list. The same also happened for Gore Street Energy Storage Fund (LON:GSF) today too, hit the loss and gone. Tommy

22nd Nov '24

Well done. I continue to hold both.

Should I sell if a stock cuts its dividend?

Should I sell if an income stock cuts or cancels its dividend?

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Mark Simpson

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