How to boost your portfolio income when companies cut dividends

Published Wed, Feb 22 20233:01 PM EST

Dividend stocks have long been a way for investors to earn income, but recent cuts may have some concerned about what to do next. On Wednesday, Intel announced it was slashing its dividend by nearly 66%, to 12.5 cents per share from 36.5 cents. The new annualized dividend yield is 4.20%, down from 7.13%. The latest dividend is payable June 1 to shareholders on record as of May 7. Intel's move comes after VF Corp cut its dividend by 41% to 30 cents from 51 cents earlier this month, causing it to be dropped from the S & P 500 Dividend Aristocrats Index . The index is made up of stocks that have increased their dividends in each of the past 25 years or more. The companies said the cuts were meant to best position them to create long-term value. However, those recent decreases are unusual, said Howard Silverblatt, senior index analyst at S & P Dow Jones Indices. Over the last 12 months, ending Jan. 31, five companies in the S & P 500 decreased their dividend, while 362 increased it, he said. In fact, dividends "are going to easily set a record this year," Silverblatt said. He's anticipating about a 5% to 6% increase in cash in investors' pockets, even with Intel's cut. In 2022, U.S. common dividend increases were up 5% to $82.5 billion from $78.6 billion in 2021, S & P Dow Jones Indices data show. Decreases were up 63% to $14.3 billion in 2022, compared with $8.8 billion in 2021. Where to look for income Corporate dividends are just one source of income, and that income should be just one part of your overall portfolio, said certified financial planner Jamie Hopkins, managing partner of wealth solutions at Carson Group. "When you're looking at income from your investments you should consider all the available sources — CD ladders, bond ladders, dividend-paying equities and other fixed-income products like annuities — and figure out what is the cheapest way to buy that income," he said. When looking for dividend stocks, history can be a guide. "Companies that tend to increase over time don't cut them back as much during downturn times," Hopkins said. However, as VF Corp's and Intel's recent cuts show, past performance does not guarantee future results. Some sectors have dividends that are more sensitive to earnings and therefore more susceptible to downward revisions, UBS wrote in a note Wednesday. Those include financials, real estate, media and entertainment, and tech hardware and equipment, the firm said. Sectors with dividends less cyclical to earnings include energy, health-care equipment and services, semiconductors and transportation, according to UBS. Grant suggests looking at utility stocks, which generally pay a pretty good dividend. Preferred stocks and real estate investment trusts are another area to consider, although there may be some volatility, he said. Dividend funds Another option is an exchange-traded fund composed of dividend stocks. There are all different types of funds available, from those that track the S & P 500 Dividend Aristocrats Index to high-yielders. There are also funds that stick to a certain sector, like utilities. However, not all will cut a stock if the company slashes its dividend. Therefore, if income is your goal, look for those that focus on names that have a history of raising dividends. "In general, companies that have increased their dividends five to six years in a row, it is part of their culture," said Silverblatt. "It is in their cash flow." For instance, the SPDR S & P Global Dividend ETF is composed of 100 high-dividend yielding stocks and measures the performance of the S & P 500 Dividend Aristocrats Index. It currently has a dividend yield of 5.14%, according to FactSet. WDIV YTD mountain SPDR S & P Global Dividend ETF's year-to-date performance The ProShares S & P 500 Dividend Aristocrats ETF , also tracks the index. Holdings are equal-weighted and the ETF is rebalanced at the same time as the index. It currently has a dividend yield of 2.42%, according to FactSet. For Mike Moray, Integrity Viking Funds' chief investment officer, a history of raising dividends is a key metric his team uses when deciding to keep a name in their Dividend Harvest Fund . There have been two times since the fund's inception in 2012 that companies have been removed for dividend cuts, he said. The fund's managers try to be proactive in assessing companies, which means some have been removed before they decrease their dividends. "We haven't been 100% immune," Morey said. "Strong free cash flow and a history of consecutive dividend raises have made us much more buffered from dividend cuts." Laddering bonds and CDs Another way to earn income is through bonds, which have been enjoying high yields. The rate on the 10-year Treasury hit its highest level since November on Tuesday, briefly trading 3.95%. One strategy to capture that income and manage interest rate risk is to build a ladder of bonds of varying maturities. As each issue matures, you can decide to reinvest the proceeds into new bonds. The same thing can be done with certificates of deposit, or CDs, said CFP Don Grant, an investment advisor with Sabre Wealth. Interest rates on CD could hit 5.5% this year, Morgan Stanley recently predicted. However, don't just go to your local bank. Instead, shop the entire country either through a broker or online, Grant advised. "Different regions will pay different interest rates based on their regional demand for money and their real estate," he said. Depending on your income needs, he suggests a ladder of 3-month duration CDs to two years. Annuities Purchasing an annuity , which is issued by an insurance company, can also provide income. Just pay attention to fees, advised Grant. A fixed-index annuity links its potential return to market indices. A multiyear guaranteed annuity, or MYGA, offers a guaranteed fixed interest rate for a set period of time. "They are paying pretty good income streams now," said Carson Group's Hopkins. Take some profits If you need cash, there's nothing wrong with taking some profits, Grant said. "Let's say you have some appreciated stock. Go ahead and sell some of it and take off what you've earned," he said. "Strip some growth. Use that as income." — CNBC's Michael Bloom contributed reporting.