Dividend-paying stocks can offer investors the best of both worlds. They have the potential to appreciate in share price while also providing a steady stream of cash flow. One of the big advantages of owning dividend-paying stocks is that they allow investors to receive profits from a publicly traded company without having to liquidate the stock. But there are a number of reasons why it may be necessary to sell a dividend-paying stock after you receive the dividend. If you decide to sell a stock after receiving a dividend, you can expect to receive the current spot price for your shares with no other complications.
Dividend investors tend to focus on income rather than share price. Sometimes a company will decide to either reduce or eliminate its dividend and this may prompt an investor to dump his shares. In fact, many investors who own the stock will likely feel the same way and the stock price could fall sharply with so many people selling at the same time. In that scenario, you would end up receiving a much lower price for your stock if you sold the shares after receiving a dividend that had been cut.
Sometimes you will need to sell a dividend-paying stock if the company makes a major change that undermines your reasons for wanting to own the stock. The management may have decided to take on substantial debt. The company may be facing huge lawsuits, or it may have been acquired by another company that is notorious for cutting dividends or for poor management. Selling a dividend-paying stock under these conditions also could result in receiving a lower price for your shares.
If the share price of your dividend stocks has increased 30 percent or more, you may be tempted to cash them out rather than settling for a measly 1 or 2 percent dividend payout. When share prices for dividend stocks soar way higher than their intrinsic value, it actually reduces the total return you receive in the form of dividends, and there is always the risk that the share price could come crashing back down. Investors who sell dividend stocks after the price has gone up substantially will reap a higher price for their shares.
When share prices fall substantially, it actually increases the total return that investors receive from dividends. That is why a high dividend payout can sometimes be interpreted as a sign of weakness for a company. Even though you will receive a substantially lower amount for your shares if you sell while the price is way down, you may still be better off taking the hit than waiting for the price to rebound.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.