Dividend income has long been a reliable source of investment returns, particularly for those seeking a steady stream of passive income. However, the stability of dividend income is not guaranteed, and investors must be aware of the potential risks associated with dividend cuts. Historical data reveals that dividends are not immune to fluctuations, and investors who misunderstand this fact may face significant losses in income.
Since 1970, the most frequent cause of dividend cuts has been financial distress, particularly during economic downturns. The 1973-1974 stock market crash, the early 2000s dot-com bubble burst, and the 2008-2009 Global Financial Crisis all saw significant dividend cuts across sectors. Dividend cuts can have a severe impact on investors' income, with the average cut among S&P 500 companies between 1970 and 2019 being about 45%.
Even companies considered Dividend Aristocrats, known for their consistent dividend growth, have cut their dividends in the past. Some of America’s most recognized corporations reduced their dividends by 50% to 98.4% during the 2008-2009 GFC. These types of cuts can result in substantial losses in income.
Investing in dividend ETFs or mutual funds for diversification has not always offered the protection investors seek. Dividend Aristocrat ETFs and mutual funds, which focus on companies with a history of consistent dividend growth, have seen historical yields decrease by 14% to 19% in some instances.
To mitigate the risk of dividend cuts investors, particularly retirees, should consider laddering US Treasuries.
The information contained in this Higgins Capital communication is provided for information purposes and is not a solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction. Past performance does not guarantee future results.
Keywords: Dividends, Income, higginscapital, Investing, Risk, dividend cuts, Aristocrats, ETFs, Funds, Diversification, Portfolio, Recession, Dot-com, Crisis, Sectors, challenges