How Might the Economic Downturn Affect Dividends?
If a large allocation of your retirement portfolio is invested in dividend-paying stocks, you might see your household income reduced this year. During the Great Recession, dividend payouts dropped by 25% and didn’t fully recover for at least four years. Today’s financial crisis brought on by the worldwide COVID-19 outbreak has once again created a potential reduction in some dividend payments.1
U.S. dividend payers are in a sticky situation. Banks and other lending institutions saw profits drop by 50% by the end of March. These losses are expected to continue as millions of Americans continue to lose jobs and struggle to make rent, mortgage and credit card payments. Other reliable dividend payers include airlines, auto manufacturers and large retailers — also companies that have been hammered by drastically reduced consumer demand. The Chicago Mercantile Exchange recently predicted that S&P 500 index dividends will fall from 2019’s $58.24 to $47.55 this year, and even further ($42.05) in 2021. The impact on retirees could be a 27% reduction in income.2
Dividend payments — or the lack of them — may have an impact on how a company is viewed by investors. Historically, a company that paid out dividends has been considered financially stable with management that was confident about future earnings.3 Conversely, investors may interpret a reduction or halt in dividend payouts as a sign that a company is in trouble.4
Given that it took four years for dividend stocks to recover from the last recession, current retirees may want to start looking at alternative income stream ideas. However, traditional alternatives may also have drawbacks in the current economy. For example, investors may consider turning to master limited partnerships (MLPs). An MLP is a company organized as a publicly traded partnership in the natural resources or real estate sector. Historically, MLPs have been considered low-risk, long-term investments that provide a steady stream of tax-sheltered distributions to investors.5 However, the combination of falling oil prices and falling transportation demand due to the COVID-19 pandemic has put many MLPs under financial stress.6
Today’s crisis has demonstrated that some traditional sources of retirement income are vulnerable to disruption. Now more than ever, it’s important that retirees and pre-retirees develop a financial plan that takes into account their need for asset preservation strategies, growth and reliable income. If you have any questions or concerns about your own financial plan, give us a call. We’ll be happy to talk.
Content prepared by Kara Stefan Communications.
1 William Baldwin. Forbes. April 16, 2020. “How Much Will Your Dividends Get Cut?” https://www.forbes.com/sites/baldwin/2020/04/16/how-much-will-your-dividends-get-cut/#17263d3319cf. Accessed June 9, 2020.
2 Ibid.
3 Amy Fontinelle. Investopedia. May 15, 2020. “Companies That Pay Dividends — And Those That Don’t.” https://www.investopedia.com/ask/answers/12/why-do-some-companies-pay-a-dividend.asp. Accessed June 9, 2020.
4 Chad Langager. Investopedia. June 4, 2020. “Why Would a Company Drastically Cut Its Dividend?” https://www.investopedia.com/ask/answers/06/dividendpaymentcut.asp. Accessed June 22, 2020.
5 James Chen. Investopedia. Aug. 28, 2019. “Master Limited Partnership – MLP.” https://www.investopedia.com/terms/m/mlp.asp. Accessed June 9, 2020.
6 Pensions & Investments. March 24, 2020. “Pipeline funds imperiled with end of MLPs in sight.” https://www.pionline.com/private-equity/pipeline-funds-imperiled-end-mlps-sight. Accessed June 9, 2020.
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