Remember. In November 2011 I shared with you my concerns about CenturyLink, which made up my wallet at the time. The stock was about to go 24 consecutive months without a dividend increase. In addition, the distribution ratio of 143% did not suggest any favorable outcome. A week later, I sold the stock, following the announcement of a new quarter of unchanged dividend and a distribution ratio that climbed to more than 190%. CTL thus became the first position sold of my portfolio, despite a yield of 8% which would have tempted more than one. It is even the only title that I have sold to date.
We tend to forget it, but dividends also have risks. One of these, and this is a warning sign, is stagnant dividends. When this happens, it is best to close out your position and run. This is especially true when the company has grown its distributions for 37 consecutive years like CenturyLink, and the distribution ratio becomes particularly worrisome. If the company has been able to grow its dividends over such a long period of time and suddenly can no longer do so, then there is a real problem.
A dividend that stagnates, with a high distribution ratio, has every chance of one day being reduced, or even cut. And when that happens, not only does your income drop, but the stock price drops, and so does your capital. While Growing dividends outperform the market Overall, stocks that experience a dividend cut perform poorly.
Unfortunately this is what happened to CTL. After failing to grow its dividend in 2011, the company lost its honorary rank ofdividend aristocrat, which rewards companies that have increased their distributions for more than 25 consecutive years. This is when I closed my position. Nevertheless, despite the extreme distribution ratio, the company was able to pay the same dividend in 2012. But in the first quarter of 2013 it was forced to reduce it from $ 0.725 to $ 0.54, causing the stock to fall dramatically:
Today, despite this drop in the dividend, the distribution ratio still stands at 180%. There is therefore a strong chance that a further dividend cut will occur, dragging the share price down with it. Investors who are only attracted by the attractive yield could therefore be in for another nasty surprise.
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Hello Jerome,
Why don't you use options to reduce or even eliminate market risk? Setting up a protective put at 6 months or more and for example selling calls every month allows for more peace of mind,,,
the celtinvest videos on the site or on u-tube are very interesting ,,,
Personally, I followed Paul's training, it's fascinating and we no longer see things in the same way...
Hello Guyem. I prefer to stick to what I know, dividend paying stocks. I have my own risk management that follows this strategy and gives me good results. I am not a fan of options.
D,,,
You are lucky (I mean: have the skills) to be able to manage your risk like this,, I am also interested in dividend stocks, and that is why I am trying to cover them using options,,
This is a good example of a warning sign of a dividend cut or reduction. I had a case of a stagnant dividend recently: Molson Coors (TAP). The dividend did not move in 2012 or 2013. So I sold it.