About to Sell Dividend Stocks? Read This First

We often spend a lot of time researching and deliberating before deciding to buy a stock. That's very sensible. But selling stocks also deserves careful consideration -- because you don't want to sell a stock at the wrong time or for the wrong reason. Here are some things to consider before you sell stocks -- especially dividend stocks.

Image source: Getty Images.

Image source: Getty Images.

Are you selling because of impatience?

Impatience is a bad reason to sell any stock. Ideally, you bought the stock because the company behind it is a high-quality one, growing and with competitive advantages. The stock of such companies is likely to rise over time, but it won't do so in a straight line. There will be occasional temporary downturns or periods of stagnation. Patience is a key trait of successful investors.

Is the stock no longer among your top ideas?

On the other hand, are thinking of selling because you no longer have faith in the company? If things have changed and it no longer seems promising to you -- perhaps because of management actions or competitive developments or deteriorating financial measures -- then selling can make a lot of sense. A smart investing strategy is to keep your money concentrated in your best ideas -- the stocks you find most promising. After all, why be invested in your 57th-best idea when you can just add money to one of your top 10 ideas that are likely to be better performers?

A shrunken payout is a red flag. Image source: Getty Images.

Has the company reduced or eliminated its dividend?

With dividend stocks, a big red flag that should trigger some thinking about whether to sell is if the company reduces, suspends, or eliminates its dividend. Companies mainly do so when they're experiencing troubles. Dig into the situation to see whether it appears to be temporary or lasting and act accordingly. Think of the credit crisis of a few years back, when lots of financial companies either went out of business or at least reduced their dividend payments. Many have recovered and either reinstated or increased their payouts. General Electric, for example, cut its quarterly dividend from $0.31 to $0.10 in 2009. It has been increasing it since 2010, but it's still only $0.24. Bank of America cut its payout from $0.64 to $0.32 in 2008 and then down to $0.01 in 2009. So far it has climbed back to $0.075.

Is the dividend not growing much?

Meanwhile, plenty of companies that aren't in trouble will simply not grow their payouts very briskly. That can make a dividend much less attractive. Dividend growth is important to keep in mind when choosing your dividend stocks in the first place, because if Company A's dividend is yielding just 2% and Company B's is yielding 3%, Company A's dividend may still be more compelling if it's growing at a much faster rate. If so, in a few years, you might be collecting more from Company A than from Company B. But if that dividend growth rate stalls, you may want to move your dollars elsewhere -- especially if the dividend income was a large part of the reason you bought the stock.

Is the stock's payout ratio very high?

A dividend payer's payout ratio is also important. It reflects the portion of earnings that's being paid out in dividends. If it's, say, 70% or less, there's plenty of room for continued dividend growth. If it's 100% or more, there's little room for growth -- or error -- and perhaps the dividend will even end up reduced. Don't be hasty in your judgment, though. Consider the bigger picture, because some good companies will only temporarily have a steep payout ratio, such as if they had a bad year that temporarily depressed earnings.

Image source: Getty Images.

Have you considered tax consequences?

Next, think of taxes before selling any stock. Remember that short-term capital gains are taxed at ordinary income tax rates (which are often 25% or 28% and can approach 40% for high earners), while most of us face rates of just 15% on long-term capital gains, with high earners still paying less than 25%. This can matter if you're thinking of selling a stock you've held for, say, 11 months. If so, and if it will result in a gain, consider hanging on until you've held it for at least a year and a day. Then you'll get the lower tax rate. Don't let taxes dictate your decision, though, as sometimes it's just best to sell a stock as soon as possible, lest it fall further -- or because you have a much more compelling alternative for the money.

Image source: Getty Images.

When is the ex-dividend date?

Finally, with dividends, you might assume that you need to consider the ex-dividend date. It's actually more important when buying a dividend stock than when selling one, though. When a company announces an upcoming dividend payment, it sets the date of payment. It also sets an "ex-dividend" date, which is the date by which you must own it in order to qualify for the dividend payment.

Here, for example, are a few examples:

Data source: Nasdaq.com.

You might think that you need to sell before the ex-dividend date to collect the dividend, but that isn't quite the case. That's because on the ex-dividend date, the stock's price will fall by about the amount of the dividend. So if the stock were trading for $100 per share and would be paying a $1 quarterly dividend, the price will fall to about $99 on the ex-dividend date. So if you sell before the ex-dividend date, you won't receive the $1, but if you sell on or after it, the stock will sell for about $1 less. It doesn't make a huge difference, either way.

When selling any stocks, including dividend stocks, be sure to do so for sound reasons, not out of impulse or panic or impatience. Remember that in many cases, the best way to make a lot of money is to be very patient with great companies.