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Oct 1, 2015

BTSX How I Deal With Dividend Cuts

by Ross Grant

Ross GrantIt has been a rough time on the TSX this year for resource-based stocks.  As a follower of the BTSX process, I am usually sheltered from some of the volatility in this sector, but that is not the case this year.  Two of the three new additions to the 2015 BTSX list were resource companies.  Unfortunately, Teck Resources Inc. (TCK.b) and Cenovus Energy Inc. (CVE) both cut their dividends this year. 

If I was true to the original BTSX process, I would wait until December 31st  when the annual review takes place and sell the stocks at that point, assuming that they did not make it to the new list.  But, as I mentioned in my e-book, I have added a small refinement.  If a stock I own cuts its dividend, I sell the stock as soon as possible.  From experience, I have learned that holding on to dividend-cutting stocks tends to be a poor choice.  There are often follow-on dividend cuts and a continual slide in price with these stocks.  It seems to be the rare stock that quickly climbs back from these situations.  If they survive, it tends to be many years before the dividend starts to increase and even longer until they get back to where they were before the original dividend cut.  It seems that when a board of directors cuts a dividend, they know that the long-term prospects are looking quite poor.  Their action speaks louder than words.

February 2014, was the first time I had to deal with a BTSX stock cutting its dividend.  TransAlta Corp (TA) cut their dividend by 40%.  I wrote about the action I took in my 2014 year-end summary that came out in the February 2015 CMS issue.  TA was sold then at $13.48.  As of today, July 30, 2015, it is at $8.29, a 38% decline.  Glad I got out of that one!  I replaced it with Bank of Nova Scotia (BNS) at $63.95 and, with it now at $64.19, let’s call it a 0% gain.  This is an example of when a 0% return looks good when considering the alternative.

In the June 2015 CMS issue, I wrote about the dividend cut of TCK.b that occurred on April 21st.  The reduction was a 66% cut.  I purchased it on Jan.1st for $15.88 and sold at $16.40 after the dividend cut for a small 3% gain.  TCK.b had been higher than my sale price before the cut and shortly after, but by July 31st  it was down to $9.63.  It is now down 39% from Jan 1st.  Again I was glad I sold.  Hindsight being 20/20, I am also sorry I bought, but the ‘sell on dividend cut’ guideline has proven to serve me well.  TCK.b was replaced by Shaw Communications Inc. (SJR.b) at $27.31.  Today SJR.b is at $27.75, so I will call this fairly close to a 0% return so far.  Interesting how this situation was so similar to the first example.

Most recently, CVE cut their dividend by 40% on July 30th .  Following my guideline, I sold CVE for an unfortunate 21% loss.  After re-running the BTSX list to get a current ranking, the stock that would be added to the list is TransCanada Corp (TRP).  TRP has moved up on the ranking due to its decrease in stock price this year and its dividend increase in February.  These two factors have driven up the dividend yield to 4.1%. 

Only time will tell whether my dividend-cutting guideline has saved me again or not.  I will review this in my year-end results that should appear early next year.  It is concerning that I have ended up with the dividend-cutting stocks in my BTSX list but I hope that I have mitigated the negative impact with my actions.  Fortunately, these dividend-cutting companies, due to their own dividend-reducing actions have likely removed themselves from potentially being in this sort of list for many years to come.  If they do appear, I may have to filter them out based on previous bad experiences.  I continue to look for steady dividend-paying stocks that will allow me to live peacefully in retirement, while still experiencing overall returns that are outpacing the index.  

If you have any questions or would like more information on my e-book, please feel free to contact me.

Ross Grant is the e-book Author of Destination: Early Financial Independence, available on Amazon and Kobo for $5.99. Free e-reader software is available for PCs, MACs, etc. to view the books.  Please email him if you need the links.  You can reach him at RossGrantEFI@gmail.com