Should I have Sold after Dividend Cuts or Freeze?

Two of my fellow bloggers (D4L and DGI) on The DIV-Net have presented their perspective on how to deal with a given company stocks when it decides to cut of freeze the common shareholder dividends. You can read their viewpoints at these links (D4L at Article1, DGI at Article1, Article2, and Article3). Both the bloggers have presented very compelling arguments supported by relevant data set. It would be hard to argue with their observations and conclusions. Here I am discussing my approach on how I dealt with dividend cuts and freeze in my portfolio.

Since year 2005 in my dividend growth portfolio, I had owned BAC, WFC, C, WL, and GE. I will not use GE in this discussion because I am focusing on financial sector. By early 2007 I had reached my limit (10% maximum) of asset allocation in terms of my actual capital allocated. Prior to peak during Oct 2007, my financial sector allocation became in excess of 14%. This was due to the increase in value. Even though I became over allocated in financial sector, I did not take any action. And that was a mistake. I should have used re-balancing (or stopped automatic dividend re-investment in same stock).

My primary reason for investing in these stocks was dividend growth (and secondary being value). Now year 2008 brought dividend cuts in all four financial stocks viz. BAC, WFC, C, and WL. The value of the share price started to plunge and I started to incur paper loses. I had to taken action of reducing my risk and cut my losses.

This is where I believe individuals need to look at their strategy from their own perspective, measure it against their own objectives, measure it against their own portfolio risk profile, and then take action.

I reduced my portfolio risk by selling C and WL when dividend cuts were announced. I took a very small loss on C, and 5.3% total loss on WL. For both of these stocks, I did not see them satisfying my buying objective of dividend growth and value. In addition, both of these companies did not seem to have any strong market positioning to given me confidence of their survival. I continue to hold BAC and WFC. There are few reasons.

(1) My overall portfolio allocation in these individual companies had become very small, well below my max limit of 3% in each company. This was driven by reduction in market value. In addition, my allocation to financial sector was well below my max limit of 10%. Therefore, even if I continue to hold these stocks, I would be comfortable from the viewpoint of my allocation and personal risk profile.

(2) At this point in time, I continue to believe that eight to ten years down the line these two companies will still survive. These two still have value in the sense that they have significant market presence in the financial industry.

(3) I did some re-allocation in my capital. I moved WFC and BAC in my value/opportunity portfolio. In terms of number of shares, I doubled my position in BAC at price of $4.19. Similarly, in terms of number of shares, I increased my stake in WFC by 40% at a price of $11.13. After increasing my stake, the share price for both stocks continued to slide. The biggest concern was possibility of nationalization of BAC. For few days, I thought it was a big mistake. However, at this point in time, the combined positions for both of my stocks are very close to even value. Now time will tell, if this was a mistake or not.

The purpose of this discussion is not to present a counter argument to viewpoint of my fellow bloggers. I presented a differing viewpoint which calls for prudent strategy based on individuals risk profile and how they have structured their portfolios. I sold some and bought some. I know selling was a right decision. Time will tell whether buying was right decision or not.

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