Row Rowland has a nice piece at Invest With An Edge on the major flaw of dividend income plans: dividend cuts. Dividend stocks are all the rage nowadays, what with baby boomers starting to retire and stock yields above Treasury yields for the first time in 50 years.
I’ve got nothing against dividend stocks. Heck, Dorsey Wright Money Management selects securities for a series of First Trust dividend UITs. But I agree with Mr. Rowland that many dividend investors severely underrate the odds of their dividends being cut.
The article contains a table of the largest dividend ETFs, reproduced here, that shows how much dividends were cut from 2008 to 2010.
Yes, your dividend ETF is probably on this list. And as you can see, the dividend cuts ranged from 21% to 53%! Dividend ETFs are quite popular with retirees, most of whom wouldn’t be too pleased to take a 20% cut in their income. The only exception shown on the table is the Vanguard Dividend Appreciation ETF (VIG). It suggests that maybe there is some protection in a rising dividend fund, although the initial yield is the lowest of the bunch.
Another potential way to try to reduce the possibility of dividend problems is by using relative strength screening. For the First Trust UITs, we own the highest relative strength dividend payers in each industry group. We believe that strong stocks are less likely to have dividend cuts than stocks that are in a death spiral. There’s probably no perfect way to run a dividend portfolio, but that’s one way to try to capture a higher current yield (roughly 3.9%) with some degree of protection from dividend cuts.
For information on the First Trust Dorsey Wright Relative Strength Dividend UIT, please click here.
Click here for disclosures from Dorsey Wright Money Management. Past performance is no guarantee of future results.
