Can you predict dividend cuts?

Income investing is far from risk free but companies with competitive advantages and healthy balance sheets are less likely to cut or scrap dividends

Dan Lefkovitz 4 December, 2018 | 6:00PM

Low interest rates and an ageing population hungry for retirement income has swelled equity income funds since the financial crisis, even as growth stocks have outperformed. The appeal of dividends goes back to the days of the Dutch East India Company and extends beyond the cash payout. Reinvested dividends and dividend growth contribute a substantial portion of the long-term total return of equities.

Though they may be overshadowed in the short term by the market’s high fliers, dividend-paying stocks have a strong long-term track record, as the dividend commitment instills discipline on corporate managers. Yet equity income investing is far from risk-free. A company can lure investors in with yield, only to experience financial distress, dividend cuts, and share price declines.

From financial services and housing-related stocks in 2008–09, to energy and materials in 2015–16, to General Electric (GE) in 2017, the past decade is littered with cautionary tales of dividend traps. Overvaluation is another pitfall. Yield-hungry investors can bid up the shares of dividend payers, as seen in 2016, when the price of utility stocks exceeded their fair value.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of America Corporation25.39 USD1.52
Citigroup Inc51.04 USD1.79
ConocoPhillips38.02 USD1.01
General Electric Co6.40 USD4.23

About Author

Dan Lefkovitz

Dan Lefkovitz  Dan Lefkovitz is a content strategist for Morningstar's Indexes group.

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