There are two key ways to earn money investing in stocks. Dividends and capital gains. You earn capital gains by selling, but dividends by holding.
Here is why most sell strategies are shortsighted for dividend stocks.
Realising Profits
When the price of your stock goes up or down you have “unrealised” profit or loss until you actually sell and it becomes "realised" profit or loss. Selling the stock to realise profits is also known as “taking profit”.
You need a strategy to decide whether to hold for dividends or sell and take profit. There's no right strategy, just different ones. Some investors use multiples. I like the 5x6 principle. “If the stock increased 5x it’s dividend yield in 6 months, you should take profit”. If you can lock in 5 years of dividends within 6 months, you should do it.
Short-Term Strategies
Some investors will go as far as “if my profit will be higher than this upcoming dividend, then sell”.
Now, this is a very different perspective. They're used to buying and selling often. Their perspective is “I'm risking potential profits for one dividend”. In fairness, a stock will commonly dip roughly the dividend value after the Ex-date. (When it's too late to get the dividend). Their timeline is also different. I’m taking a 5-10 year perspective, they're taking a 1-7 day perspective.
Why it's a Bad Strategy
- Holding realises profit anyway, as dividend.
- All else equal, it usually trends back up toward the next ex-date too.
- If the stock was a good investment, why sell just to get a tiny %?
- Foregoing future dividends and growth.
- If you want to get future growth, you have to get back in again, having missed the dividend, and likely pay a higher price.
But Can Make Sense If
- Profit is much higher than the dividends (5x6 principle above)
- Dividend isn't expected to reoccur
- You believe the stock is no longer a good investment (you should sell anyway)
- Capital gains are taxed significantly lower where you live