Selling dividend stocks in May makes passive income go away

When it comes to income stocks, Stephen Wright thinks selling in May and going away can lead to missed dividend payments. He has a better idea.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Dice engraved with the words buy and sell

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the FTSE 100, the FTSE 250, and the S&P 500 up over the last month, it’s tempting to take profits on dividend stocks. But for investors seeking passive income, I think that’s a really bad idea.

Put simply, selling a number of dividend shares in May (in line with the old stock exchange adage) would mean not owning them on their ex-dividend date. An investor who does this would miss out on the shareholder payment later in the year.

Ex-dividend dates

As an investor looking to earn passive income, the point of focusing on dividend stocks is to receive a share of the company’s earnings as direct payments. But selling shares in May (or any other time) gets in the way of this.

In order to earn dividend income, an investor has to be eligible to receive the payment. This involves owning the stock on the ex-dividend date.

For a number of companies, that date is in May. So an investor who sells shares at the start of the month might well miss out on passive income payments.

Tesco shares

Tesco is an example of a stock with an ex-dividend date in May. The company is set to distribute a dividend of 7.05p per share in June, which amounts to a 2.5% return on an investment made at today’s prices.

The ex-dividend date is 11 May. So in order to receive the dividend in June, an investor would have to own the stock at the start of that trading day. 

Selling Tesco shares at the start of the trading day with a view to buying them again in October would mean missing out on a potentially significant payment. So clearly, selling is a bad idea for passive income investors.

Passive income

It’s not just Tesco, either. Other popular dividend stocks in both the UK and the US have ex-dividend dates in May.  

Unilever for example, goes ex-dividend on 18 May. And investors who sell shares in Bunzl, Kraft Heinz or Visa will miss out on dividend payments later in the year.

Investors looking to earn passive income by receiving dividends should therefore think very carefully before selling. Doing so might interrupt their income stream.

Buying and selling

In theory, the risk of missing dividend payments might be offset by the opportunity to buy the shares again at a later date. But I don’t think this is a good reason to sell a stock.

The price of a company’s shares might well drop on their ex-dividend date. In the case of Tesco, the stock is worth more when it comes with a 7.05p payout than when it doesn’t. 

This isn’t guaranteed, though – a lot can happen in the stock market and share prices are notoriously difficult to predict. An investor could sell only to find the share price rising.

How to invest

Ultimately, the best way to invest for passive income is by following Warren Buffett’s example. Buy shares in strong companies at good prices and then wait for the payments to roll in.

Doing this allows investors to benefit from the cash generated by the underlying business over a sustained period of time. Those who don’t plan on selling their shares can leave share price fluctuations for others to worry about.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Kraft Heinz and Unilever Plc. The Motley Fool UK has recommended Bunzl Plc, Tesco Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Prediction: these FTSE 100 stocks could be among 2025’s big winners

Picking the coming year's FTSE 100 winners isn't an easy task, but we're all thinking about it at this time…

Read more »

Investing Articles

This UK dividend share is currently yielding 8.1%!

Our writer’s been looking at a FTSE 250 dividend share that -- due to its impressive 8%+ yield -- is…

Read more »

Investing Articles

If an investor put £10,000 in Aviva shares, how much income would they get?

Aviva shares have had a solid run, and the FTSE 100 insurer has paid investors bags of dividends too. How…

Read more »

Investing Articles

Here’s why I’m still holding out for a Rolls-Royce share price dip

The Rolls-Royce share price shows no sign of falling yet, but I'm still hoping it's one I can buy on…

Read more »

Investing Articles

Greggs shares became 23% cheaper this week! Is it time for me to take advantage?

On the day the baker released its latest trading update, the price of Greggs shares tanked 15.8%. But could this…

Read more »

Investing Articles

Down 33% in 2024 — can the UK’s 2 worst blue-chips smash the stock market this year?

Harvey Jones takes a look at the two worst-performing shares on the FTSE 100 over the last 12 months. Could…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Are National Grid shares all they’re cracked up to be?

Investors seem to love National Grid shares but Harvey Jones wonders if they’re making a clear-headed assessment of the risks…

Read more »

Investing For Beginners

Here’s what the crazy moves in the bond market could mean for UK shares

Jon Smith explains what rising UK Government bond yields signify for investors and talks about what could happen for UK…

Read more »