Time To Sell Low Yielding Dividend Stocks?

As dividend growth investors we seek to continually add to our income producing portfolios in an effort to generate an ever increasing passive income stream. Central to this occurring is finding the perfect balance of high enough yield that is sustainable versus the lower yielding dividend stocks that exist. While yield cannot be the only focus a dividend investor pays attention to, it is the butter to our bread as all distributions come from that yield. But what happens when a portfolio starts to contain an increasing number of lower yielding or no yielding stocks as a result of spin offs, mergers or buyouts? This is the question I’d like to pose to you, my readers. Do you keep or sell these positions?

 

As many of you already know, my portfolio is probably one of the more conservative that you have seen online. I still do not own one energy stock, including MLPs nor do I have one technology stock either. I have added health REITs less than a year ago to my IRA but the bulk of my overall portfolio rests within the conservative β€œstandard” consumer staples and industrial plays.

 

Recently, when looking at my portfolio holdings I began to wonder about potentially selling a number of my positions that yield under 2% in favor of stocks already in my portfolio that yield over 3% thereby juicing my future passive income stream. In each case I’ll outline, I am up via capital appreciation plus dividends over the years but seeing minuscule yields makes me wonder if I’m putting my investment dollars to best use as my main focus is dividend income. These names include:

 

Allegion Plc (ALLE) yielding 0.75% a spin off of Ingersoll-Rand Plc (IR) up 204.04% or $1,194.66

 

CR Bard Inc. (BCR) yielding 0.47% up 138.95% or $472.08

 

Becton, Dickinson and Company (BDX) yielding 1.71% up 99.06% or $1,566.04

 

Halyard Health, Inc. (HYH) yielding 0% a spin off of Kimberly-Clark Corporation (KMB) up 35.27% or $32.17

 

Mondelez International, Inc. (MDLZ) yielding 1.61% a spin off of KRFT (KHC) up 111.97% or $709.52

 

As you can see from the names above, while collectively up around $4,000 in capital appreciation, barely yield 1% together. This is where my potential sell consideration comes from. Ever since I became a dedicated dividend growth investor I have not sold one share of any stock. I held strong during the great recession and more recently through every less drastic market swoon that occurred. It can be inferred that I do not like to sell, especially when companies continue to grow their dividends and provide a nice capital appreciation as well. I just take issue when several of my holdings collectively yield around 1%.

 

What would you do if you held stocks that were yielding small distributions? Do you think that money is best invested elsewhere? I would love to read your opinions on the matter below.

 

Disclosure: Long ALLE, IR, BCR, BDX, HYH, KMB, MDLZ, KHC

 

46 thoughts on “Time To Sell Low Yielding Dividend Stocks?

  1. Ciao DH,
    Interesting post! As I am crippled by double taxation issues my PF has already a focus on higher paying dividend stocks. Having said that if you believe that the stock is going to grow in the future then probably you can stick to some low yields, I keep Disney for example despite the risible contribution that they are giving me now, I hope that in a few years it will be much better πŸ˜›
    Another point to consider is complexity. I am also trying to reduce the overall complexity of the PF, reducing the number of stocks that I hold so that I can be more focused with what I am left. So in a way if these spinoffs are yielding low figures and require work to follow… maybe you have the answer already…
    Ciao ciao

    Stal

    • Hi Stalflare,

      Clearly, I like to buy and hold all my positions as I have not sold anything since I became a dividend growth investor. That’s not to say that I’ll never sell, I just better have a very good reason to. To tell you the truth, after tallying about $4,000 that I could free up if I sold all those names mentioned I began to really think about what that extra dividend income could do for me in the long run. After all 0% or anything under 1% doesn’t really provide that much income anyway. Something to think about. Thank you for commenting.

  2. Hi DH,
    I sold HYH and will sell any spinoff that doesn’t pay a dividend. Yes one-day it might pay a dividend but I could use that argument to buy any non-dividend paying stock which kind of defeats the purpose of my investing for income. Likewise my VHDYX fund at Vanguard will eventually sell zero or low dividend yield funds based on its “high-yield” criteria. The fund takes a lot of the psychology out of the equation for me so I don’t have to worry about it.

    But if I had an individual stock that I bought at a reasonable yield and it increased in value so that the yield drops, I likely wouldn’t sell because in dollar amount terms it’s still paying out increasing amounts of money each year. Dividend growth and company prospects would be a more important criteria for selling I think and I would want to avoid chasing yield in that sense. I have about 6 stocks that have dropped below my 2.25% entry criteria although the lowest is 1.8% (HD) so this hasn’t been a major concern for me. My investment Charter allows me to sell when the yield drops but doesn’t mandate it.

    Of course if some of your stocks have doubled, you could always sell half and buy something else I suppose. I would suggest making an investment policy / strategy about how to handle these cases. What if every one of your stocks doubled in price and the yield dropped? Sometimes taking the example to extremes can helps determine a strategy.

    I look forward to reading your conclusions, best wishes!
    -DL
    Dividend Life recently posted…World dividend growthMy Profile

    • Hi DL,

      Thank you for your input. I wonder what most people have done with their HYH as KMB is a pretty popular dividend stock and I’m sure HYH can be found in many other portfolios. I never really came up with any general set of rules for my portfolio to deal with this situation as I never really thought about selling any of my positions for a long, long time. I guess it’s not all bad having a lower yielding stock that has appreciated dramatically but that doesn’t do much for me in terms of my passive income goals especially when a stock yields 0%. Sure, BCR, BDX and the like are perennial dividend growers having raised their distributions for multiple decades but they still provide a small collective portion of my overall dividend income which is what I’m trying to maximize. Thank you for sharing your thoughts.

  3. Nice question DivHut. We each have to think about the same issue. I evaluate each of the junior positions and assess their business prospects and dividend growth potential. Mondelez was the only company we had, of the group you mentioned. I ultimately decided to sell it, not because of the dividend yield, but because management did not seem to be able to perform. Over the last few years, food input costs have generally trended lower, but Mondelez’s profits and margins remained the same…..even when taking currency out. The return on equity metrics were not as good as I thought they should be, considering they control such great brands.

    I hope you have a great week!
    -Bryan
    Income Surfer recently posted…Kansas WanderingsMy Profile

    • Hi IS,

      I guess this question is similar to the one I posed a while back about selling after a dividend cut. While most feel strongly about dividend cuts, I think deciding to sell a lower yielding stock is a little more subtle. Your decision to sell MDLZ came down to company performance and not because of its yield as you stated. Again, that may make the decision to sell a little easier as you are assessing the stock based on performance. The stocks I mention all have performed quite well in terms of capital appreciation and dividend growth, yet still return just a small amount of cash every quarter and that’s where my issue rests. I am thankful to receive these comments and opinions from other like minded investors. Thank you for stopping by.

  4. There are the occasional times when you have the opportunity to capitalize on some appreciation and invest back into other stocks that are (or at least appear) to be a better fit with your dividend growth strategy. Think that we would have sold the shares and bought a couple other (higher yielding) options to speed up the path to FI.

    Good luck with the decision.
    Team CF recently posted…Why Do We Have Advertisements?My Profile

    • Hi TCF,

      You bring up a good point about occasionally making sales to lock in a profit and then have the resources to deploy that cash elsewhere. I guess I have been looking at the situation from a black a white perspective and focusing on yield and returns when I wrote this. After all, 3% will return more than 1%, at least initially. I realize there are dividend growth rates to consider as well but when I see about $4,000 that I could deploy in a higher yielding stock already in my portfolio it makes me think about whether or not I’m making the most of my investment dollars. Thank you for sharing your thoughts.

  5. Hey DivHut!

    This is an interesting question. I’d say that the first point would be to determine if those companies are still in line with your investment thesis in the first place. From what I understand, they were all spun-off from companies you were holding in the first place. Then, you might as well sell them. (between you and me 4K on your total portfolio worth as a very minimal impact on your dividend yield and overall performance).
    Then, I personally like low dividend yield stocks with high dividend growth. For example, I rather keep my DIS shares yielding 1.48% as they pay me 2.63% based on my cost of purchase and I bought them only 3 years ago. If the company continues its growth rate, I will be making 5% yield in now time (plus a huge capital appreciation). This worth a lot more than a company paying a 3% yield now, but increasing its payout by 4% each year. I think it’s good to have a mix of “low yield high dividend growth” and “good yield steady dividend growth” in your portfolio.
    Over the past 4 years, I’ve been focusing on dividend growth instead of yield and I can say that it was definitely worth it πŸ™‚
    Cheers,
    Mike
    DivGuy recently posted…Portfolio UpdateMy Profile

    • Hi DG,

      When I first started on the dividend growth path I remember saying to myself that I’d keep all spin offs from any of my holdings. Not to compare one stock to another, but I always go back to the example of MO spinning off PM and KFT (KHC), and KRFT spinning off MDLZ. Of course, I’m cherry picking but owning just one dividend payer not that long ago would have yielded four total companies each paying growing dividends. That’s a beautiful thing for any dividend growth investor to experience. As you saw from my numbers in the post the other stocks I just bought to complement my overall portfolio and all have appreciated quite nicely. While it’s nice to see a stock go up in value it doesn’t do anything in terms of increasing your passive income stream which is my main goal. I agree with you that dividend growth is key to being a long term investor and as you can see from my portfolio I own a lot of those lower yielding but growing dividend payers. I appreciate your opinion on this matter. Thanks for sharing.

  6. I wouldnt necessarily sell just because the yield is low. It depends on what your outlook for each of those companies is. I am not familiar with some, but companies like MDLZ and BDX I am familiar with – so I will comment on them. I think theres a lot of growth left — and the companies can keep delivering increased dividends for years, if not decades, to come. I know its tempting to sell to realize those gains, but essentially you are trying to time the market.

    Just my two cents πŸ™‚
    R2R
    Roadmap2Retire recently posted…Recent SellMy Profile

    • Hi R2R,

      Well, I bought some of those lower yielding companies because they do have long histories of growing their dividends and room for overall growth. I think you can see by the amount of capital appreciation in each of these names that they have performed quite well and still have room to grow as you suggest. That’s where the conflict rests when being a dividend growth investor looking for growing income rather than just capital appreciation. Could those gains be realized and redeployed in another dividend grower with a starting yield of 3% instead of 1% or less and be better off? Thank you for sharing your opinion on this matter.

  7. DH,
    As long as the share is yielding, and growing that payout annually its a really tough call to sell. CR Bard is a great example of excellent history, that has just become way overvalued, is that a good reason to sell though? On the other hand a stock yielding 0% from a spin off is a much easier sell.

    – Gremlin
    Dividend Gremlin recently posted…Recent Buy, April 2016My Profile

    • Hi DG,

      “As long as the share is yielding, and growing that payout annually,” is the reason I have not made one sale to date since becoming a dedicated dividend growth investor. Dividends continue to increase as well as capital appreciation so it becomes less clear in deciding whether or not to sell, even with a low yield of 1% or less. The HYH example might be the only “easier” choice to make as it is sitting in my portfolio generating 0%. Of course, that corporate policy may change and a dividend may be initiated one day but in the meantime it’s “dead weight.” As always, I appreciate your comment and opinion.

  8. Great question. I think you need to take a hard look at each company and see if any of them look like they are poised for decent growth over the next 12-24 months. If a few of them are, I’d save them and ride it out. You can always sell at a later date. But for those spinoffs that are not interesting to you or just don’t make sense in your portfolio, I’d sell them and buy different stocks.
    Investment Hunting recently posted…Stock Watch ListMy Profile

    • Hi IH,

      Going forward I still like the prospects of those holdings, I just do not like the minimal return they are providing my portfolio in the meantime. I guess it just comes down to the question of whether I’m deploying my cash in the best possible manner. For now, I am inclined to keep all those holdings, even HYH yielding 0%. I appreciate all the comments and opinions on this topic as I’m sure each one of us has faced this issue at some point during our dividend investing run. Thank you for sharing your thoughts.

  9. Hi Keith,

    I have been a dividend growth investor for a little over 8 years. One of my favorite things is to go back and evaluate my past decisions. This helps me observe any issues with my process, and hopefully help me become a better investor.

    I would say that the majority of sell decisions I have made in the past 8 years have been mistakes. I found that I would have been better off just staying the course, and not doing anything. I have also found that chasing yield could be a mistake as well.

    When you sell, you pay taxes. Then you have less money to work for you. That way, the new investment has to generate more returns than the one you already hold. Unfortunately, you cannot say with any level of confidence upfront which investment would be better off. But you will be able to say in 5 or 10 years whether the decision to sell really paid off.

    Best Regards,

    Dividend Growth Investor
    Dividend Growth Investor recently posted…Procter & Gamble Raises Dividends for 60th Year in a rowMy Profile

      • Hi DFG,

        It’s all about weighing sells (profit) versus income received from dividends in my opinion. As most of us are all dividend growth investors I would think that yield, dividends, income and the like are the most important aspects of our investments. If that’s the case, then we should sell for other reasons and not just because of a low yield.

    • Hi DGI,

      Always nice to hear from a fellow dividend growth investor that has been following this investing method as long as than I have. I think your experience can provide great insight. In my tenure as a dedicated dividend growth investor I have not sold one share of any stock in my portfolio. Looking back, I’m happy with my decision and find it interesting that the majority of your sells were mistakes. Of course, this lends credence to what you and other have been saying all along, stay the course and just hold on. I want to be clear that I wouldn’t be chasing yield in the traditional sense. If I did sell some of these names I would not buy some 10% high yield fantasy rather I’d buy something already in my portfolio such as PG, KO, ABT, CL, CLX, UL, CAT, EMR, ITW and the like. In other words, only solid dividend payers. I’d be trading 1% or less for something currently paying 3% or more.

      Of course, taxes are a concern though my holdings are all long term and would qualify for lower tax rates. As I stated, this was just an issue that came to mind as I reviewed the yields of my holdings and found more than a few that seemed to be lagging in the dividend department. Thank you for stopping by and sharing your thoughts.

  10. I can only comment on HYH (KMB). I’ve used it as a trading vehicle since the spin. I initially sold on the price spike with Ebola fears and was in and out a couple of times. Bought back in with the price drop in February. I currently have 30% more shares at a price point 10% lower than I had at the spin. There are rumors of a buyout which wouldn’t surprise me as we’re nearing the two year anniversary. With their acquisition of Corpak (pending), I anticipate holding my current position.

    • Hi Charlie,

      Thanks for your personal take on HYH. I know many dividend bloggers have sold that name right after the spin off from KMB occurred. My “rule” has been to keep all spin offs and so far that has worked out well with the names mentioned as well as others not mentioned. It’s funny witnessing the ebbs and flows of spin offs and takeovers. I agree that HYH does look like a good acquisition candidate going forward. Congrats on making HYH work for you after the spin off with your buying and selling of the stock. I just held and did nothing since receiving. I’m inclined to just hold on to HYH even though it pays a 0% yield. I may just “cash out” with a potential buyout. I appreciate your comment.

  11. Excellent post! and great comment answers.
    DGI is not my core skill. With the knowledge and understanding I have, I would not kick out a stock id the yield drops below a threshold under the condition that the dividend still grows. It could be a temporary spike in the stock price.

    The risk with selling and buying higher yielding stock is that you start to trade and chase returns. I do think this should only be done in a minor part of your portfolio.
    ambertree recently posted…Amber Index and Saving Rate – March 2016My Profile

    • Hi ambertree,

      I know this is a question that every dividend investor faces at some time. After all, our main focus is increasing our dividend income more so than capital appreciation which is why I am considering selling the lower yielding stocks in favor of higher yield. You do bring up a good point about not chasing yield which is something that I have never done and I would only consider buying companies that are already in my portfolio which I have already done the homework on.

      During the recent market lows we experienced, it was tough to see CAT, EMR and others yielding 4% and 5%. Dividend stalwarts by any measure while some of the names I mention in the post yielded around 1% or less. That’s the only point I’m trying to make. Believe me, I have no intention of selling these solid names in favor of some 10% fantasy yield. I won’t do that πŸ™‚ As always, I appreciate your comment.

  12. Hey Divhut, really good question.

    I suppose I would look at it along the lines of – What is their future going to be like. Does it look like they have a long and profitable future ahead? If so, I would keep them. The only reason I would sell for is either if their future isn’t great, or there is a much better investment that you could put your cash towards. Otherwise the brokerage, taxes and un-diversifying probably isn’t worth it.

    Tristan
    Dividendsdownunder recently posted…Goals Progress: First Quarter 2016My Profile

    • Hi Dividendsdownunder,

      To answer your question, I still like the future prospects for each of these holdings and I see plenty of dividend raises in their future as well. Based on that criteria it’s a no brainer. I just am not excited about their low yields. I guess there are many ways to look at this question. The more I read these comments the more it seems like I should just hang on. Thank you for stopping by and commenting.

    • Hi FV,

      I have looked at my yield on cost for these holdings, and while they each grew their dividends (except HYH) they still offer fairly low current yields. I’m inclined to keep these names as you can see from the gains are some of my best performers in my long term portfolio. I think you mention two keywords from your comment that I must make a decision on, “replacement yield.” I think that’s what it really comes down to. Thank you for sharing your opinion.

  13. Nice post and I have few stocks like that in my list as well. Stocks like C, CMG, GOOG etc do not pay dividends or yield very low. I purchased these stocks before I started concentrating on dividend growth stocks. I have capital growth on all these stocks, but not sure if I should sell these. Also, these are in my taxable account and hence would end up paying capital gains. So I have just been holding these as is. Keep us updated on what you do.
    Dividend Growth Journey recently posted…Sharebuilder Purchase – 4/5/2016My Profile

    • Hi DGJ,

      I think this is a question that every dividend growth investor asks from time to time as inevitably, for a variety of reasons, we end up holding lower yielding or even no yielding stocks in our portfolios. From most of the comments I have read here and on Seeking Alpha it seems that holding steady may be the best course of action to take. Of course, should a sell come my way I’ll be posting about it. Thank you for commenting.

  14. All of us have been in same situation, DH: spin-off’s typically do not result into big positions and with no known dividend history, I sell them. However, I like some of the companies you mentioned: MDLZ and BDX and considering to add them. With your portfolio of about $200K, $4K is just 2% and lets say you sell all of them: 1) you will incur long-term capital gain taxes, so, you will lose ~20%, right there 2) in case new securities yield even 3%, difference of 1% on $4K is not much, to the extent to compensate for taxes. Overall, you are better off to keep them, unless, you really want to move on to other securities and not have to deal with these spin-offs. Good luck and keep racing!
    Race2Retirement recently posted…Recent Stock Purchase I – April 2016My Profile

    • Hi R2R,

      It’s really great reading all these opinions on this topic as it helps me draw my own conclusions about my portfolio holdings. I believe you are the first opinion I have read here and on Seeking Alpha that has a blanket rule about selling spin offs. Up until now my blanket rule has been to keep every spin off. I mentioned the MO example in another comment about how that one stock has spun off into four total holdings today with PM, MDLZ and KHC as MO offsprings. With that kind of lineage who would want to sell just because of a spin off? Of course, I cherry picked that name. I also hold HYH which pays 0%. In general, you are probably right in that I should just keep the stocks and stay the course. Between capital gains taxes and trying to compensate those taxes with new yield it might be more effort than it’s worth for a relatively small part of my overall portfolio. Thank you for sharing your opinion.

  15. Hi DivHut,

    I think you are not in trading options, but thats what I would do:

    I would sell some covered calls on the stocks, if you have a position of 100 shares. So I would get the premium, the dividends and the capital gains, if the the option expires in the money. If the option expires out of the money, you “only” get the premium and the dividend.

    keep at the great articles
    best regards
    easydividend recently posted…Dividendenerhöhung: Procter&Gamble (PG)My Profile

    • Hi easydividend,

      Options are definitely one way to potentially “sell” a low yielding position and collect extra premium as well. As you know, I do not trade options at this time. It’s something I want to try but not ready to venture into that world yet. Kudos for thinking outside the box for potentially selling a stock. I appreciate your opinion.

  16. there is nothing wrong with selling some stock that you see being “overvaluated”. Divestment is a strategy. With that said, I’m very bad at short selling. heheh.

    • Hi vivianne,

      For this discussion I wasn’t really looking at value as much as current dividend yield. Of course, it usually goes hand in hand as a stock prices rise, become overvalued and thus have a lower current yield. This exercise was just about seeing if I could extract extra dividend income by going after higher yielding stocks in my portfolio by selling the low yielding stocks. It seems that most people say I should stay the course. Thank you for commenting.

  17. Hi Keith,

    nice article and yes it is worth considering selling this stocks. Just imagine how much time it would take to receive the gained value by the dividends. But yes it is going to be a tough decision. Also it would be interesting to know the yield of cost, as it should be considered as well.

    cheers
    Div.Income recently posted…Portfolio Update MarchMy Profile

    • Hi DI,

      I’m sure every dividend investor wrestles with the decision of selling a massive gainer versus simply holding and collecting those dividends. You are right that those gains from the sales would equal almost a years worth of dividends collected so from that perspective it should be a clear signal to cash out and put those proceeds into other stocks. However, my main focus is not just capital appreciation, rather increasing my passive income stream. I’m not against selling, I just know it will be a very rare occurrence in my long term portfolio. Thanks for sharing your opinion.

  18. Great post Divhut! It is an interesting thought and dilemma you face here. We all want the income now. If you don’t have capital, obviously assessing your portfolio for options to sell and use the capital to re-invest will help. The one thing that makes me nervous is that you were looking to sell some high quality companies just because they offer a low yield. I would caution against chasing yield here just for the sake of having higher income. That’s how I have made mistakes in the past.

    If it were me, I would proceed with caution. I wouldn’t even consider the size of my gain since it sounds like the most important decision point for you is increasing your dividend income. If I am making the move, I want to get one of the best companies like JNJ, PEP, etc. Don’t sacrifice the quality of your investment for the short-term increase in dividend yield.

    Keep us updated with your decision. Very interest to see how you proceeds.

    Take care!

    Bert
    Dividend Diplomats recently posted…Wells Fargo & Co (WFC) Stock AnalysisMy Profile

    • Hi DD,

      It’s true that my main focus is increasing my dividend income rather than seeking capital appreciation which is why I’m reluctant to sell in the first place. Many have commented that I hold some very high quality names at attractive prices so why sell and remove them from my account. I can totally understand that line of thinking. The whole focus of this discussion was to find a way to boost my dividend income by simply “trading” my 1% yielding stocks for 3% yielding stocks already in my portfolio. Judging by the overall sentiment of our fellow bloggers I think I may just hold steady and do nothing. Thank you for sharing your opinion.

  19. I don’t personally think low yield is a problem, but 0% yield is. If your goal is to live off your dividends, obviously 0% won’t accomplish this. However, low yields will. They won’t get you to FI fast, but we’re all in this for the long game.

    I would get rid of stocks that produce less than 1% and use that as your qualifying factor for future stocks. It’s what I do at least. I don’t hold anything under 1%. There are a lot of good quality stocks still to choose from still. Even though I REALLY wish Alphabet and Amazon had dividends SO wish, but since they don’t, they won’t produce my future income and I won’t hold them. That’s me. =P
    Wallet Squirrel recently posted…Robinhood App Review: I saved $420 in trading fees in 6 monthsMy Profile

    • Hi WS,

      I only hold one 0% yielding stock (HYH) which was a spin off of KMB, otherwise every holding of mine produces income. As you know, as a dividend growth investor, we always seek ways to increase our passive income streams any which way possible. While seeing some low yielding candidates in my portfolio I began to wonder if they were pulling their “dividend weight” or not and perhaps there was a logical way to juice my returns further. I would never consider a 0% yielding stock for my current portfolio but at times they just happen to appear without intent. As I mentioned in other comments, I get the sense that I should pretty much do nothing and hold on to my low yielding stocks as long as they are producing income and growing their dividends annually, which they are. Thank you for stopping by and sharing your thoughts.

    • Hi JP,

      Interesting take. Seems like most wouldn’t sell a stock just because of its low yield. It has been something I was considering but I think I may just hold steady and keep all the stocks I mentioned in this post no matter the yield. Thanks for sharing some of your stock selections. Owning an MLP is not a bad thing if you can stomach commodity price fluctuations. I appreciate your comment.

      • There are other MLPs that are not tied to the oil/gas industry; I’m not a huge fan of that sector, but was curious about the MLPs, so I dug around and found a few that were a little different from the rest: STON and FUN

        • Hi DH,

          Thanks for sharing those other L.P’s. I actually wrote about the “death care” industry a while back in a round up of dividend payers in that sector. I didn’t realize that FUN was structured that way as well. It’s nice to know there are options out there in the L.P. space that are not in the oil/gas sector. I appreciate the share!

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