If you are counting on dividends to deliver income upon retirement, you may want to temper your expectations.
This week, Wells Fargo joined the list of 773 listed companies – 63 of them on the S&P 500 index – whose dividends are reduced or discontinued. Although you may not have seen major changes in income during the first half of the year due to the delay between a announced dividend and when you receive it (or notice that it is missing), the next six months may be disappointing.
“The second half of the year will not be too good,”
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Dividend-paying stocks generally reward long-term investors, and usually pay them quarterly from the company’s profits. For retirees who are afraid of losing their savings, this can offer a regular income stream without having to sell assets.
Although not all stocks have cut or stopped dividends – at least 972 either increased or initiated them this year – relying solely on these income payments, the bigger picture may be missing.
“Investors may need to change their minds about what it means to generate revenue from their portfolios,” said certified financial planner Adam Reinert, chief investment officer at Marshall Financial Group in Doylestown, Pennsylvania.
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“If you think about what income means, it’s really just dividends and [bond payments], or is it cash flow from the portfolio as a whole? “he said.
In other words, Reinert said, think of dividends, interest rates and asset growth as the building blocks of an income stream. That way, he said, you can reduce some risk that comes with focusing too much on these returns (payments as a percentage of the asset price). The average return on dividends in total has been approximately 2% per year.
“If you only focus on dividends or coupon payments, you can see something with a higher return, say 6%, but it can be risky,” Reinert said. “Maybe the price will fall, or the dividend has not been adjusted yet.”
Retirees can also use the bucket method – with fixed income investments, such as US government bonds – to plan for income over a multi-year period.
“You effectively cover your living expenses for five or seven or ten years by purchasing appropriate interest rate investments to match that time horizon,” said CFP Michael Hennessy, founder and CEO of Harbor Crest Wealth Advisors in Fort Lauderdale, Florida. “Then the remaining funds in your retirement account can be invested to capture long-term stock growth.”
It may also be worth upgrading your dividends by replacing companies with weaker balance sheets – and more likely to cut 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 and executive management know that a growing dividend is extremely important to the majority of their shareholders and will protect it at all costs, even if it is not necessarily the optimal short-term solution,” Anderson said.
Even if a company cuts or shuts down its dividends, it can resume or increase them when its finances are stronger.
“They will probably bring them back,” Anderson said. “But the reason they’ve had to reduce them is trouble in their business, so it probably will not be in the near future.”
Silverblatt at the S&P Dow Jones Indices reckons that further dividend cuts will be more common among small and medium-sized public companies as the economy struggles to correct itself.
“I expect these companies to feel the most,” Silverblatt said.
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