Sometimes Dividends Get Cut

Some people ascribe special significance to the recent dividend cuts among several Blue Chip financial institutions. They should not. Such cuts happen from time to time.

The usual reaction by a dividend investor is to exit fast when dividends are cut. This makes sense. Prices will fall by as much as cuts (in percentages), if not more. Almost always, bad news follows bad news. It takes time for a stock price to hit bottom.

Retirees need a reasonable amount of diversification. Exchange Traded Funds (ETF) can help. But you must study the details of each. They are all different.

Dividend investors are much safer than those who depend upon capital appreciation. But even the post-1950 S&P500’s dividend went through a bad period. It fell temporarily to 75% of its original buying power. Still, this was much better than prices. Prices by themselves fell below 45% of their original buying power. Balances with dividends reinvested fell to 65% of their original buying power.

Selling when prices are low is what kills retirement portfolios. A dividend investor does not face this problem. He may tighten his belt, but only temporarily. He is never in danger of bankruptcy.

Much more often, companies grow their dividend amounts. Typically, dividends grow faster than inflation, albeit erratically.

Have fun.

John Walter Russell
January 17, 2008