If you have been reading this blog for a while, you know that, for the most part, we are long-term, buy-and-hold investors. Once we invest in a company, we try to build up our position over time by investing new cash or reinvesting dividends (i.e. via DRIP). We like to buy high quality companies that pay consistent dividends and that increase their dividend payout every year.
Essentially, we like to leave our stocks alone and let them compound over time.
Now that’s the ideal case, but from time to time, we do sell dividend stocks and close out positions. For example, over the last few years, we have closed out Canadian Tire, Target, Johnson and Johnson, and Intel.
So, when is it time to sell or trim a dividend stock or close out a position?
That’s a tough question; it’s never easy to sell, because sometimes it’s hard to let go of a winning stock and reinvest the money elsewhere. On the other hand, sometimes it’s hard to let go of a losing stock and not wonder if the share price will recover.
Let’s examine why and when we would consider selling dividend stocks.
1. The business has fundamentally changed
Some dividend growth investors will exit a position whenever the company cuts its dividend.
While a dividend cut is a giant red flag, for us, that doesn’t always mean we will sell the stock immediately. If the dividend cut is warranted and means it can help the company clean up its financial books, we may continue to hold the stock and adopt a wait-and-see approach. For example, we didn’t close out BCE when the board decided to cut its dividend payout by over 50%.
Having said that, if the company’s fundamentals are changing, deteriorating, and there’s no sight of improvement in the short or medium term, it’s time to consider selling.
What do I mean by fundamentals?
- Shrinking revenue
- Persistent losses
- Increase in debt
- Reduction in competitiveness
- Major leadership dysfunction or changes
- Major shift in business strategy
One example would be when we sold all of our Intel shares. Years ago, Intel used to be the leader and innovator in chip designs and manufacturing. In the last five years, Intel is no longer an industry leader due to delays in process node advancement, over-reliance on in-house manufacturing, the global outsourcing foundry model, and leadership and strategy problems. In fact, Intel is now investing heavily to catch up to the likes of TSMC, AMD, Apple and Nvidia. Whether Intel can turn the ship around remains to be seen.
Because Intel lost its innovative edge, we believed our money could be better invested elsewhere, so we closed out our position.
Furthermore, if the company decides to pivot and change its key strategies, it’s usually time to sell. What do I mean by that? For example,iIf McDonald’s decides to stop selling burgers and fries and decides to get into the financial services sector, it may be time to sell McDonald’s. Now, this is probably a drastic example since companies don’t typically do a complete 180 shift in their key strategies. But if McDonald’s decides to expand into the soft drink business to compete with the likes of Coca-Cola and PepsiCo, as an investor, you should ask yourself whether this shift in business strategy makes sense and whether you want to continue investing in this company.
Whenever the business fundamentally changes, I usually ask myself this question: Would I still buy this stock today, knowing what I know?
If the answer is a definite no, I would sell the stock without a question.
2. Tax-loss harvesting
If we have capital gains from investments in non-registered accounts, we may consider selling a losing stock to offset the gains. This is something we did last year. I had some capital gains from selling my company’s stock. To offset the gains, I sold some shares of BCE.
3. The stock price has been flat over the last number of years & dividend growth is limited
As much as we like dividend income, we pay close attention to dividend growth and total return. Total return is especially important because you want your capital to grow over time.
Collecting steady dividend income is nice, but it’s no good if the dividend income doesn’t cover inflation and the initial investment doesn’t grow over time.
Say we invest $1,000 in a dividend-paying stock yielding 5%. It’s great that we’re getting $50 worth of dividends each year. But it’s no good when…
- The company doesn’t increase its dividend payout, or only increases its dividend payout by less than 2%, which doesn’t keep up with the rate of inflation.
- The share price has stayed relatively flat over the last few years
This was why we closed out our position in Omega Healthcare (OHI) in 2023. OHI share price had declined from a high of around $44 to $26 due to the global pandemic. Although the share price recovered slightly to around $37 in 2021, the share price dropped to below $30 and stayed around the same level between 2022 and 2023. Although OHI had a relatively high yield, there had been very little dividend payout increase. Looking at our invested capital and the total return from OHI, we decided that it was better to exit OHI and invest the money elsewhere.
Note: OHI share price has since recovered to ~$40, but essentially we’d be simply collecting dividends that haven’t been raised since October 2018.
4. The stock is significantly overvalued
Another reason for selling dividend stocks is when the stock is significantly overvalued.
No, I don’t mean that if the stock is over a specific price. What I mean is when a stock is trading at an extremely high valuation compared to its historical range. And most importantly, the underlying business hasn’t changed much. In other words, the jump in share price could be driven by market hype.
For example, if a stock has been trading between 14 to 16 earnings historically (i.e. PE ratio) and all of a sudden shoots up to 30 times its earnings, I would want to dig into the reason behind this. Is this sudden jump justified by massive growth expectations? Did the company do something to warrant this increase in the PE ratio? Or is it simply market hype and will most likely fade away?
In most cases, we may not exit the position. We may simply trim the position and redirect the money into better-valued opportunities and potentially buy back when the stock goes back to its historical valuation.
5. Portfolio concentration or rebalancing
Since we hold many different individual dividend stocks, our goal is to have each stock make up less than 5% of our dividend portfolio. Now, this is not a hard and fast rule; if a position happens to go to 6 or 7%, we don’t usually worry about it. We want to have flexibility and some wiggle room. But if a stock grows to more than 10% of our portfolio, we would trim it to reduce risk.
In the case where a stock goes north of 5% of our portfolio, we would typically rebalance our dividend portfolio by buying shares of stocks that make up a smaller percentage of our portfolio. But occasionally, we do trim a little bit when there’s a share price run-up. This is something we are monitoring for both TD and Enbridge lately. Both of these stocks have had a bit of a price run-up and they each now make up around 7% of our portfolio.
Similarly, if we find our portfolio too heavily weighted in one sector (say, financial or energy), I may rebalance by trimming some stocks in the sector to avoid overexposure.
Don’t get me wrong, it’s not about panic selling – it’s about protecting ourselves against volatility and maintaining diversification.
When not to sell a stock
This is probably the most important part. We don’t sell when:
- Market panic: In my relatively short DIY investing career, I have seen my share of market panics – the global financial crisis (2008-2009), the recent US tariff announcements (2025), Brexit (2016), COVID-19 crash (2020), GameStop/MEME stock mania (2021), Russia-Ukraine War (2022), Silicon Valley Bank collapse (2023), US debt ceiling (2011 and other years too), tech selloff due to rising interest rate (2022), and the list goes on. I have long learned that the best time to buy is when the market is dropping. It is not the time to sell!
- Media noise: ignore the analysts. Analysts typically have a very short-term view. Just because an analyst downgrades a stock, it doesn’t mean the stock is all of a sudden worthless
- Everyone is selling: just because your kid’s teacher, your mechanic, and your neighbour are all selling the same stock, it doesn’t mean we need to follow the herd. Don’t follow the herd. Widespread fear of a stock can potentially mean a buying opportunity.
- When the investment thesis is still valid: when the company fundamentals have not changed and your original investment thesis is still valid, you should ignore the short-term issues and short-term volatilities.
In other words, it is best to ignore the day-to-day noises. As Warren Buffett said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
With free commission trades available at many different online brokers like Questrade and Wealthsimple Trade, it is far easier to sell nowadays. The average holding time of stocks went from about 2 years or more ten years ago to five to six months today (used to be eight years in the 1950s). It’s even easier to sell today so it’s crucial to really go through the decision process and not get caught up in the day-to-day market volatility & emotions.
Final Thoughts – When to Sell Dividend Stocks
Selling a dividend stock is never an easy decision. Whenever we are considering selling a stock, we always go through several rounds of this thought process before we make the final decision to sell or not. It is also extremely important to separate emotions during the decision-making process. It’s important to base your final decision not on the stock price, for the stock doesn’t care what you paid for it, but on the fundamentals of the company!
Since focusing on dividend growth investing in 2011, I have learned that hanging on to a stock just because it pays dividends simply doesn’t make sense. If your money can work harder for you somewhere else, it is time to sell. (It’s all about total return!)
More importantly, the goal is not to avoid selling forever. The goal is to make each selling decision with intention. Another important lesson I have learned is that once you do sell, don’t second-guess yourself and look back at the decision months or years later and regret it. Learn not to look at the past and constantly ask yourself the could-have, would-have questions. Rather, learn to look ahead.
