How Much Will Your Dividends Get Cut?

Be prepared for a 27% reduction in shareholder pay.

Were you planning to live off dividends in retirement? Plan on living frugally for a while. A fairly long while.

In the last recession, which ended just over a decade ago, dividends fell by a fourth and took four years to recover. It’s going to be just as bad this time around.

Historical and predicted dividend on the index
S&P Divs FORBES

That’s the bet being made in the futures market. Contracts trading on the Chicago Mercantile Exchange predict that the dividend on the S&P 500 index will fall from $58.24 in 2019 to $47.55 this year and $42.05 at the low point in 2021. That’s a 27% reduction in spending money.

The furthest out contract for which there has been recent trading volume is for 2026, when the prediction is that the index’s dividend will have inched back only to $56.65. If the futures bettors are right, dividend recovery will take at least eight years.

This grim outcome is not etched in stone. The trading volume on the CME dividend contracts is thin in the out years, and the bets may, of course, turn out to be too bearish. But it is just as probable that the bets aren’t pessimistic enough. You do not have to strain to see trouble.

U.S. banks, big dividend payers, saw profits cut in half in the first quarter and can expect more loan losses as people stop making rent, mortgage and credit card payments. The big British banks have already killed dividends.

The airlines now lining up for federal care packages can’t pay dividends. Neither can their supplier Boeing. Freeport McMoran had to stop its dividend because copper prices are low. Auto plants are mostly closed and so Ford Motor suspended distributions. Macy’s furloughed most of its workers and isn’t paying a dividend.

No surprise that restaurant chains Brinker International and Dave & Busters sent workers packing and, having done that, are telling shareholders to wait. Macquarie Infrastructure Corp. gets much of its revenue from services in tourism-dependent Hawaii and airport fueling; the company’s $1 a share distribution in March is the last of its kind for a while.

The dividend cuts and suspensions announced in the past month would seem to be just the beginning of a prolonged drought. Goldman, Sachs is predicting a second-quarter contraction in economic output of 34%. This would be much worse than what the economy experienced in 2007-2009, and that recession was enough to take the S&P 500’s dividend level down 25% in inflation-adjusted dollars (see chart).

Some shareholders haven’t yet witnessed the damage. Consider Restaurant Brands International, the holding company for Burger King, Tim Hortons and Popeyes. When last heard from on the subject, in February, the company was declaring a 52-cent quarterly dividend (duly paid April 3) and was targeting $2.08 for the full year. Will it meet that target? Fast-food joints can do takeout and deliveries, but even so are hurting. McDonald’s says that its same-store volume was off 22% in March.

Host Hotels & Resorts, a real estate investment trust with a lot of Marriott and Starwood hotels, gallantly paid out 20 cents a share April 15. That represented no reduction in the regular dividend. But how long can that go on? Consider what happened in the last recession, which now looks, in comparison to today’s cessation of leisure travel, rather mild. In 2007 Host paid $1 a share; at the low point in 2010 its payout was down to 4 cents.

Food distributor Sysco Corp. is on the treasured list of “dividend aristocrats,” companies that have raised dividends every year for 25 years. Its 45-cent dividend, up from the previous 39 cents, just went out. Can Sysco keep up the streak? Maybe. But most of its business is supplying the food-away-from-home market, and people are no longer away from home.

The past decade of low bond yields has caused income-hungry investors to fall in love with dividends and with the notion that a portfolio of blue chips can raise payouts forever. Now dividend lovers are in worse shape than if they had just settled for the crummy yields on bonds.

ProShares has an ETF holding S&P 500 dividend aristocrats like Sysco. The fund did not protect savers from the 2020 correction. Its return so far this year is -18%, Morningstar calculates, versus -13% for whole index.

How much does dividend trouble hurt the lifestyle of a retiree? Consider someone who, at the end of 2019, put a $1 million retirement portfolio into a 60/40 mix of stocks and bonds. For this purpose let’s use the exchange-traded funds Vanguard Total Stock Market (ticker: VTI) and Vanguard Total Bond Market (BND). Our hypothetical saver would have obtained 3,685 shares of VTI and 4,800 shares of BND.

That collection of shares pulled in $21,600 of income in 2019. Next year, if dividends sink to the lows expected in the futures market, the income will fall to $18,200.

These payouts, moreover, include an unsustainably high distribution from the bond fund. BND’s portfolio consists of bonds bought at lower prices and now trading at an average 9% premium to par value. The fund’s payout today reflects the higher coupon rates of yore.

To gauge the true earnings on a bond portfolio you have to allow for the erosion of premiums as bonds approach maturity. With such an adjustment applied, your 60/40 balanced portfolio is going to deliver only $15,400 of spending money next year. After that the income will, God willing, begin a gradual recovery.

What to do if you were counting on $21,600 to fund your retirement? There are two ways to react. One is to carry on with your original spending plan, necessarily dipping into capital at a time when your portfolio is depressed. That may leave your nest egg permanently damaged.

The other strategy is to adjust budgets in response to market conditions. You’d tighten your belt for a few years and increase your chance of being comfortable in later years.

Either way, a $1 million pot is not the stuff of a princely retirement these days.

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