When I Decide to Sell a Stock Based on Dividend Yield

As a dividend income investor, my investment focus has always been directed towards sustainable and reliable dividend income.  I am not in this game for flashy short-term capital gains or speculative plays.  I invest in dividend-paying stocks because I want to build a consistent income stream that grows over time and supports my financial goals, especially as I inch closer to Barista FIRE.

That is why dividend yield plays a central role in my stock selection, and just as importantly, in my sell decisions.  

**Before I get any objections, I would like to highlight that dividend yield is just one of the factors that help me decide whether to sell or not.  There are other very important factors like payout ratio, profitability of the business, dividend growth and other metrices like price to earnings and price to book ratios.  However for the purpose of this write up, I will only be discussing how dividend yield impacted my investing decisions.**  

My Preferred Dividend Yield Range: 3% to 7%

I generally look for stocks that yield between 3% to 7%.  To me, that range hits a sweet spot.  It is high enough to generate meaningful income, yet typically low enough to be sustainable by the underlying business.  Anything below that range does not align with my goals of building decent passive income, and anything above it raises red flags in my book.

Why I Avoid Dividend Yields Above 8%

When I see a company paying dividend yield above 8%, I do not get excited, in fact, I get cautious.  Of course, it does not always mean that high dividend yield equate to bad investment, but in my personal experience, a yield that high is often the result of a falling share price rather than a growing dividend.  And when share prices fall drastically, it is usually for an undesirable reason, one of weakening fundamentals, excessive leverage, or looming dividend cuts.

One striking example is the case of US commercial REITs listed in Singapore, such as Manulife US REIT and Prime US REIT.  At one point, both REITs offered double-digit dividend yields, and on paper, it looked like a dream come true for yield-chasers.  However the reality was, their yields surged not because they raised distributions, but because their share prices collapsed.  The commercial office market in the US was under intense pressure post-COVID, with high vacancy rates, falling property values, and rising interest rates.  These created a toxic cocktail for heavily leveraged REITs.  Eventually, both Manulife and Prime suspended dividends altogether.  Their high yields were simply the last flash before the bulb went out.  I have always believed that if something looks too good to be true in the dividend world, it usually is.  These examples reinforce why I stay away from what I call "dangerously high yields".  I would rather earn a safe 5% than chase an unsustainable 10%.

When Yields Fall Below 3%

On the flip side, if a stock’s yield falls below 2.5%, it no longer fits within my dividend strategy.  It could be because the share price has rallied significantly while the dividend has not kept pace, or perhaps the company is reinvesting earnings instead of rewarding shareholders.  A stock may still be fundamentally strong, but I evaluate every position based on what it is contributing to my income stream.  If the yield compresses too far, it may be time to trim or rotate into something more aligned with my goals.

A Personal Example: Singapore Technologies Engineering (STE)

Take STE for instance.  I have held this stock for years and appreciated its consistent dividends and government-linked stability.  However in the past year, its share price surged nearly 100%, fueled by improving earnings, strong order books, and positive market sentiment.  This rally, however, brought its dividend yield below 2.5%, far outside my ideal range.  As such, I have started gradually selling a small portion of my holdings, not because I think STE is a bad company, instead quite the opposite, I still believe in its long-term prospects.  However from a dividend income perspective, I think the capital can be better deployed elsewhere, into other stocks yielding closer to 4–6%.

The Role of the Risk-Free Rate

Many investors, especially institutional ones, always compare a stock’s dividend yield to the risk-free rate, typically the yield on a government bond (like the US 10-Year Treasury).  This comparison helps answer a key question: "Is the extra yield from the stock worth the added risk compared to a risk-free asset?"

If the risk-free rate is 4%, and a stock only yields 4.2%, the 0.2% difference may not justify the market and business risks involved.  However if a stock yields 6% while the risk-free rate is 2%, that 4% spread might look more appealing, provided the dividend is sustainable.  It is a valid framework, and one used by many yield-focused investors to assess risk-adjusted returns.

Personally, I have not factored the risk-free rate heavily into my decisions.  My focus is more on the yield itself, the sustainability of that yield, the payout ratio by the company and the quality of the underlying business.  Some may say that is a gap in my process, and I do not disagree.  In an environment where interest rates are rising or remain elevated for a long time, the opportunity cost of holding low-yielding equities becomes more significant.  Moving forward, I may eventually incorporate this risk-free benchmark as a supplementary check when I am deciding to buy any shares, not as the core driver, but as a contextual factor.

All in all, for me personally, dividend investing is about discipline and consistency.  I do not chase high yields, and I do not hold onto stocks blindly.  When the yield falls out of my preferred range, especially when it becomes too low, I try to rotate capital into other higher-yielding, high quality and more income-efficient opportunities.

On the flip side, when a yield looks too good to be true, like in the case of Manulife or Prime US REIT, I step back and wonder, “What’s the catch?”.  This is because in the world of dividends, there is usually a catch.

As for the risk-free rate, I am beginning to appreciate its role more in today’s macro environment.  As SORA gradually dips below 2%, most dividend-paying stocks are becoming more and more attractive.  While I still do not use it as a core filter, it is becoming a useful point of comparison.  In the end, yield remains one of my core deciding factor, both when I buy and when I sell.