Avoid Dividend Cutters At All Costs

Companies cut dividends when they either expects that business would deteriorate to an extent where all cash might be needed to sustain the business or because they cannot afford to pay the dividend. When management expects losses that would drain cash in the near future, they are very likely to cut distributions. When dividends are cut, stock prices typically nosedive as the last investors who have held on hoping for better news leave the sinking ship. As a rule, I always sell when a company announces that it would be cutting dividends. Over the past three years I have had four situations, where I have had to deal with dividend cutters and eliminators. In 2008 American Capital (ACAS) suspended its dividend payment. In 2009 General Electric (GE) and State Street (STT) also cut distributions, in the middle of the financial crisis. In 2010 oil giant British Petroleum (BP) suspended distributions, amidst pressure from the US Government to hold onto its cash in order to be able to pay for the oil spill it had created. In all but one of the situations, I would have been better off simply holding on, without selling. The reason why I typically sell after a dividend cut is that as a group, companies that cut and eliminate dividends have underperformed the market since 1972 according to a study by Ned Davis Research. Another reason why I sell is that with dividend cutters and eliminators you have the risk that the company might be on the brink of collapse.... Read more