Personal Finance

How to rethink your retirement income strategy as more firms cut dividends

Key Points
  • The tally of publicly traded stocks that have slashed dividends this year is expected to continue growing amid ongoing economic uncertainty.
  • The bulk of those dividend cuts are likely to be more prevalent among small and mid-sized companies, one analyst said.
  • Retirees who rely on those payments for steady income may want to adjust how their portfolio is structured so their cash flow comes from total returns, not just income-producing investments.

The coronavirus-induced economic upheaval is taking a toll on a popular source of investment income for retirees: dividends.

As U.S. companies deal with steep revenue drops and are forced to cut expenses, 203 stocks this year have reduced or suspended their dividends, 44 of them on the S&P 500 index. And, with economic uncertainty remaining going forward, that number could grow.

"I definitely expect this to continue, unfortunately," said Howard Silverblatt, senior index analyst with S&P Dow Jones Indices, which keeps tabs on dividend actions by publicly traded common stock with a market capitalization of $25 million or more.

Westend61 / Josep Rovirosa | Getty Images

Dividend-yielding stocks generally reward long-term investors, typically paying them quarterly from the company's profits. For retirees fearful of depleting their savings, this can offer a regular income stream without having to sell assets. 

While not all stocks have slashed dividends — at least 57 have increased them this year — relying solely on those payments for income may be missing the bigger picture.

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

"If you think about what income means, is it 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 and growth of assets as the building blocks of an income stream. That way, he said, you can reduce some risk that comes with too heavy a focus on those income yields (payments as a share of the asset price).

"If you just focus on dividends or coupon payments, you might see something with a higher yield, say 6%, but it could be riskier," Reinert said. "Maybe the price is falling, or the dividend hasn't been adjusted yet."

Retirees also could use the bucket approach — using fixed-income investments, such as U.S. treasury bonds — to plan for income over a multi-year period. 

General Motors suspends dividends and share buybacks to preserve cash
General Motors suspends dividends and share buybacks to preserve cash

"You effectively cover your living expenses for five or seven or 10 years by buying the appropriate fixed-income 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 equity growth."

It also may be worthwhile upgrading your dividend stock holdings by replacing companies with weaker balance sheets — and more at risk of cutting dividends — with those whose financials suggest they are in better shape to continue paying, said Shon Anderson, a 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 board of directors, 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 isn't necessarily the optimum short-term solution," Anderson said.

More from Personal Finance:
Here's how are unemployment benefits are taxed
This is what happens to your unpaid debt at death
Card issuers cutting credit limits without warning

Even if a company cuts its dividend, they may resume or increase them once their finances are stronger.

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

Silverblatt, of S&P Dow Jones Indices, anticipates dividend cuts to be more prevalent among smaller and mid-sized public companies as the economy struggles to right itself.

"I expect those companies to feel it the most," Silverblatt said.

Subscribe to CNBC on YouTube.