Dividend cuts can mean rethinking your retirement income strategy

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If you rely on dividends to generate income in retirement, you may want to temper your expectations.Wells Fargo joined this week’s list of 773 publicly traded companies – including 63 on the S&P 500 Index – with dividends reduced or suspended. Although your income hasn’t changed much in the first half of the year due to the time lag between an announced dividend and the time you receive it (or notice it’s missing), the next six months can be disappointing.

“The second half will not be too good,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, who keeps an eye on dividend stocks for publicly traded common stocks with a market cap of 25 million. dollars or more.

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Dividend-paying stocks typically reward long-term investors, typically paying them quarterly from corporate profits. For retirees who fear they will run out of savings, this can provide a steady income stream without having to sell assets.

Although not all actions have reduced or suspended dividends – at least 972 have increased or initiated them this year – relying solely on these income payments may miss the big picture.

“Investors may need to change their minds on what it means to generate income from their portfolios,” said chartered 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, is it really just dividends and [bond payments], or is it a cash flow from the portfolio as a whole? ” , did he declare.

In other words, said Reinert, consider dividends, interest, and asset growth as the building blocks of an income stream. In this way, he said, you can reduce some of the risks that come by putting too much emphasis on these income returns (payments as a share of asset prices). The average dividend yield overall was around 2% per year.

“If you just focus on dividends or coupon payments, you might see something with a higher return, say 6%, but it could be more risky,” said Reinert. “Maybe the price goes down, or the dividend hasn’t been adjusted yet. “

Investors may have to change their minds about what it means to generate income from their portfolios.

Adam Reinert

investment director at Marshall Financial Group

Retirees could also use the compartmentalized approach – using fixed income investments, such as US Treasuries – to plan their income over a period of several years.

“You effectively cover your living expenses for five, seven or ten years by purchasing the appropriate fixed income investments to match this time horizon,” said PFC Michael Hennessy, founder and CEO of Harbor Crest Wealth Advisors in Fort Lauderdale, in Florida. “Then the remaining funds in your retirement account can be invested to capture long-term equity growth. ”

It can also be helpful to upgrade your stock of dividends by replacing companies with weaker balance sheets – and more at risk of reducing dividends – with those whose financial data suggests they are in better shape to continue to pay, said Shon Anderson, PSC and President of Anderson. Financial strategies in Dayton, Ohio. Some companies have paid dividends regularly for 25 years, or even 50 years or more, he said.

“The board of directors and the management of the company know that an increasing dividend is extremely important for the majority of their shareholders and will protect it at all costs, even if it is not necessarily the optimal solution in the short term” said Anderson. .

Even if a company cuts or suspends its dividend, it can take it back or increase it once its finances are stronger.

“They’re likely to bring them back,” said Anderson. “But the reason they had to reduce them is the distress in their business, so it probably won’t be in the near future. ”

Silverblatt at S&P Dow Jones Indices predicts that further dividend cuts will be more common among small and medium-sized public enterprises as the economy struggles to recover.

“I expect these companies to feel the most,” said Silverblatt.

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