I hate to sell a stock. When I buy a stock, my intention is to hold it forever and enjoy its ever-growing dividend income.  Unfortunately, it doesn’t always work that way. Sometimes a stock changes and no longer fits in my income portfolio. It could be a company that cuts its dividend or in some cases freezes its dividend. Let’s take a look at a two-step process designed to help us determine if we should sell a stock after a dividend freeze.

I. Does The Stock Still Meet Our Investment Criteria?

Dividend investing is about about building a reliable income stream that increases each year. When an investment stops raising its dividend it is no longer providing the future income growth required by my dividend portfolio.  The stock may still be a good value, but my dividend portfolio’s primary objective is ever-increasing dividend income, not capital gains.

Obviously, the company’s future prospects would play into a decision to keep or sell. Can the company raise its dividend, albeit late,  and still preserve a year-over-year increase? Will the future earnings provide sufficient free cash flow to pay a dividend? What other obligations, such as debt, might absorb future cash flows? Is management committed to the dividend? Would you buy this stock today as an income investment? This step determines if the stock is a candidate for a sale.

II. Are There Better Alternatives Available?

Once the stock has been identified as a candidate for a sale, the question then becomes is there something out there that is better? Don’t forget in determining the market value of a stock, the market considers any known “bad news” about about a company.  So after the bad news is out and the company freezes the dividend, the price may drop and increase the effective yield on the stock. Yield on cost is not relevant when considering a sale.

The current price and current yield are what you will receive and give up when selling a stock. With the cash received is there another stock that would be an “upgrade” from the one you are selling? What does its future prospects look like? Will the new stock replace the dividend income lost from the one sold? What does its debt and cash flow look like? Will it continue to grow its dividend in the future? Is it a more riskier stock?

If in answering these questions you determine the stock should be sold, then you pass step two. At this point, you should sell the stock that froze its dividend and purchase the one you identified in step two.

A Real-World Example

I am holding three stocks with frozen dividends.