Dividend cuts can mean rethinking your retirement income strategy

If you have dividends to generate retirement income, you may want to moderate your expectations.

Wells Fargo joined this week’s list of 773 publicly traded companies, 63 of them on the S&P 500, whose dividends are being reduced or suspended. While you may not have seen many changes in income in the first half of the year due to the delay between an announced dividend and when you receive it (or note its absence), the next six months may bring disappointment.

“The second half of the year will not be too good,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, which controls dividend shares of publicly traded common stock with a market capitalization of $ 25 million or plus.

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Dividend-generating stocks generally reward long-term investors, usually paying them quarterly on the company’s earnings. For retirees who fear running out of savings, this can offer a regular income stream without having to sell assets.

While not all stocks have cut or suspended dividends, at least 972 increased or started dividends this year, relying solely on those earnings payments may miss the big picture.

“Investors may have to change their mindset about what it means to generate income from their portfolios,” said certified financial planner Adam Reinert, chief investment officer at Marshall Financial Group in Doylestown, Pennsylvania.

“If you think about what income means, are they really just dividends and [bond payments], or is it the cash flow of the portfolio as a whole? “, said.

In other words, Reinert said, think of dividends, interest and asset growth as the building blocks of an income stream. That way, he said, you can reduce the risk that comes with overly heavy focus on those income returns (payments as part of the asset price). The overall average dividend yield has been approximately 2% per year.

“If you only focus on dividends or coupon payments, you could see something with a higher return, say 6%, but it could be riskier,” said Reinert. “Maybe the price is falling or the dividend has not yet adjusted.”

Retirees could also use the bucket approach, which uses fixed income investments, such as US Treasury bonds, to plan income over a period of several years.

“You effectively cover your living expenses for five or seven or 10 years by buying the right fixed income investments to match that time horizon,” said CFP Michael Hennessy, founder and CEO of Harbor Crest Wealth Advisors in Fort Lauderdale, Florida. “So the remaining funds in his retirement account can be invested to capture long-term capital growth.”

It may also be worth updating your dividend holdings by replacing companies with weaker balance sheets, and more at risk of cutting dividends, with those whose finances suggest they are in better shape to continue paying, said Shon Anderson, CFP and president of Anderson. Financial strategies in Dayton, Ohio. Some companies have consistently paid dividends for 25 years, or even 50 years or more, he said.

“The company’s board of directors and executive management know that a growing dividend is extremely important to the majority of its shareholders and will protect it at all costs, even if it is not necessarily the optimal short-term solution,” said Anderson.

Even if a company cuts or suspends its dividends, you can resume or increase them once your finances are stronger.

“They are likely to be brought back,” Anderson said. “But the reason they had to cut them down is distress in their businesses, so it probably won’t be in the near future.”

Silverblatt at S&P Dow Jones Indices anticipates that more dividend cuts will be more prevalent among smaller and medium-sized public companies as the economy struggles to straighten up.

“I hope those companies feel it more,” said Silverblatt.

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