Don't Sell in May: Two Reliable Dividend Stocks to Hold

For income investors, the old adage 'sell in May and go away' is misguided because selling means losing dividend payments. Instead, consider holding reliable dividend stocks that provide steady income even during market downturns. This Q&A explores why you should stay invested and what makes a dividend stock reliable.

Should investors really sell in May?

No, not if you are seeking income. The 'sell in May' strategy is based on historical seasonal underperformance of the stock market from May through October. However, for dividend investors, selling shares eliminates the opportunity to collect quarterly or monthly dividends. While capital gains may suffer during weak months, dividend payments continue regardless of short-term price movements. Many investors miss out on consistent income when they follow this seasonal rule.

Why is selling in May bad for income seekers?

When you sell a stock, you lose future dividends. These payouts are often substantial over time. For example, a stock yielding 3% annually still pays that yield even if its price drops during the summer. Additionally, selling triggers potential capital gains taxes and transaction costs, further eroding total returns. Instead of selling, income investors should focus on holding resilient, dividend-paying companies that maintain or grow their payouts through various market conditions.

What makes a dividend stock 'reliable'?

A reliable dividend stock typically has a strong track record of consistent and growing dividends (e.g., Dividend Aristocrats with 25+ years of increases). It also possesses a solid payout ratio (below 60-70% of earnings), a durable business model, and stable cash flows. Sectors like utilities, consumer staples, and healthcare often provide these characteristics. The original article highlighted two stocks that exemplify these traits: one in utilities and one in consumer staples, both known for their defensive nature and dependable income.

Which two types of stocks are often recommended for May income?

The two stocks mentioned in the original article belong to sectors that historically weather seasonal slumps well: utilities and consumer staples. Utility companies provide essential services with consistent demand and regulated returns, leading to reliable dividends. Consumer staples firms sell everyday products like food and household goods, which people buy regardless of economic cycles. Both sectors tend to have low volatility and strong free cash flow, enabling sustained payouts even when the broader market weakens.

How can I identify other reliable dividend stocks?

Look for stocks with a long history of dividend payments, low debt levels, and consistent earnings growth. Key metrics include dividend yield (not too high, which could indicate risk), payout ratio, and dividend growth rate. Use screening tools to filter for companies in defensive sectors that have increased dividends for at least five consecutive years. Also, consider the company's competitive advantage and management's commitment to returning capital to shareholders. Review the risks of holding through summer before committing.

Is it better to invest in dividend stocks or bonds in May?

For reliable income, dividend stocks often offer higher yields than bonds, especially in low-interest-rate environments. However, stocks carry greater price risk. Bonds provide fixed interest payments but limited upside. Dividend stocks can also grow their payouts over time, outpacing inflation, while bond coupons are fixed. The choice depends on your risk tolerance and income needs. A balanced portfolio that includes both can provide stability from bonds and growth from dividend stocks.

What risks should I consider when holding dividend stocks through summer?

Key risks include market volatility, sector-specific downturns, and potential dividend cuts if a company faces financial strain. Seasonal trends may cause temporary price declines, but these are not guaranteed. To mitigate risks, diversify across multiple reliable dividend stocks and sectors. Monitor each company's earnings reports and payout ratios. Avoid overconcentration in any single stock. Remember that selling in May would forfeit dividends, so holding a diversified, high-quality portfolio is often a better strategy for income.