The past two articles examined companies that had been removed from the Dividend Champions list due to dividend cuts. This final article considers whether one should have continued to hold onto those companies, or sell them and place the money into an S&P 500 index fund.
Dividend Champions are companies that have increased their dividend for the past 25 years, Contenders for the past 10, and Challengers for the past five. Companies are regularly removed from these lists for a variety of reasons. United Community Financial was removed in February 2020 because it merged with First Defiance Financial Corp. Two River Bancorp was removed a month earlier because it had been acquired by OceanFirst Financial. KAR Auction Services spun off IAA in August 2019, which forced a lowering of its dividend. In January 2019 Dun & Bradstreet went private, so it was removed.
These are situations that are not necessarily negative to the investor. Acquired companies receive recompense that may be a combination of share price and dividends. Companies that spin-off divisions similarly offer share price and/or dividend compensation. Companies going private purchase the shares of the investor.
Dividend suspensions and cuts, however, go against the investor's expectations and work to negatively affect one’s portfolio. Cuts severely impact the investor, and companies that did this were the focus of the previous two articles. The question posed here is whether or not the dividend cut of a Dividend Champion should automatically trigger the sale of the stock.
To answer this question I looked at seven companies from the previous list that had cut their dividend. I did not include Supervalu as it was acquired. The results are in the following table. I used the date of the actual cut as the reference because it was readily available, but the alert investor would have decided on the announcement date instead.
| Ticker | Company | Date of 1st Div Cut | Total Return | From the original $10,000.00 | Total Return |
|---|---|---|---|---|---|
| DBD | Diebold Nixdorf Inc. | 11/16/2016 | $1,594.85 | -$8,405.15 | -84.1% |
| PBI | Pitney Bowes Inc. | 5/28/2014 | $1,129.19 | -$8,870.81 | -88.7% |
| CTL | CenturyLink Inc. | 3/7/2013 | $5,252.15 | -$4,747.85 | -47.5% |
| AVY | Avery Dennison | 8/31/2009 | $44,560.73 | $34,560.73 | 345.6% |
| MAS | Masco Corp. | 4/7/2009 | $71,975.86 | $61,975.86 | 619.8% |
| GE | General Electric Co. | 6/18/2009 | $7,732.50 | -$2,267.50 | -22.7% |
| PFE | Pfizer Inc. | 5/6/2009 | $37,890.35 | $27,890.35 | 278.9% |
| Averages | $24,305.09 | $14,305.09 | 143.1% |
In this table, I assumed a $10,000 position in each company at the time of the initial dividend cut. I used the excellent Stock Total Return and Dividend Reinvestment Calculator to determine the total return from that date to the present. For instance, if one had a $10,000 position in Diebold Nixdorf on 11/16/2016 then today their position, considering dividend reinvestment, would be $1,594.85. This would represent a loss of 84.1%.
Had one held onto their position of Masco then the outlook would have been considerably brighter, seeing an awesome 619.8% total return. The results appear as a mixed bag, the majority offering negative results but averaging in the positive range.
Extending the question, I wondered how the results would have compared to selling the shares and placing the $10,000 into SPY, the S&P 500 ETF. I found the results in The S&P 500 Dividends Reinvested Price Calculator and placed them in the below table.
| Ticker | Company | Total Return | SPY | Total - SPY |
|---|---|---|---|---|
| DBD | Diebold Nixdorf Inc. | -84.1% | 31.7% | -115.8% |
| PBI | Pitney Bowes Inc. | -88.7% | 60.0% | -148.7% |
| CTL | CenturyLink Inc. | -47.5% | 105.9% | -153.4% |
| AVY | Avery Dennison | 345.6% | 227.9% | 117.7% |
| MAS | Masco Corp. | 619.8% | 308.3% | 311.5% |
| GE | General Electric Co. | -22.7% | 272.2% | -294.9% |
| PFE | Pfizer Inc. | 278.9% | 282.8% | -3.9% |
| Averages | 143.1% | 184.1% | -41.1% |
With 20-20 hindsight, holding onto Avery Dennison and Masco and selling the others would have been an advantageous choice. Of course, we do not have that luxury, so selling all Dividend Champions once an actual dividend cut had been made and using the $10,000 to purchase SPY would have yielded a better return.
With such a small sample it is difficult to find commonality, something that when the cut occurs tells us to sell or hold. With the ability to look into the future we would easily have sold DBD because they eventually ended their dividend. PBI, CTL, and GE cut their dividend a second time. AVY, MAS, and PFE continued increasing their dividends and have done so for the past 9, 6, and 10 years.
This is why I have spoken of gauging the importance the company has on its dividend. For some companies offering a dividend appears as a desultory act while others give it a high priority. In the table above the big winners were the companies that chose (or perhaps, were able) to eventually follow the dividend cut with a resumption of dividend growth while the big losers continued to cut their dividend.
Perception of this sort at the time is too often skewed by emotion. It is probably best to stick with the recommendation in Stock Tips are Bunk to know why you buy so that you know when to sell. If dividends are a very important reason for the purchase of the stock, and the company cuts theirs, then perhaps it is time to sell and put your money in a better place.
