For income-oriented investors, nothing can be scarier than seeing one of the core income holdings one has suspend its dividend.
Many companies, after all, are valued by many investors as a multiple of their dividend payout. This means a dividend cut or suspension can be very costly as the market adjusts said company’s valuation accordingly.
Given the need for many companies to stockpile cash in an effort to shore up balance sheets due to COVID-related uncertainty, dividend cuts and suspensions have become commonplace of late, even at some of the most prominent blue chip companies.
General Motors (NYSE:GM), for example, recently suspended its dividend payments and share buybacks as uncertainty continues to grip the auto sector, and the global economy, in a big way.
These dividend cuts have begun to change the perspective of many investors (myself included) with respect to the role of income-generating equities within one’s portfolio.
Following the “lower-for-longer” interest rate scenario we saw come out of the financial crisis, fixed income instruments such as bonds saw their respective yields drop, fueling higher-yielding equities as the only reasonable alternative for investors.
This period of market turbulence has once again shown us that dividend distributions are indeed much more prone to recessions than their high-quality fixed income counterparts, forcing many investors to adjust their portfolio allocations accordingly.
Invest wisely, my friends.
