Dividends during a downturn

The reliance on dividends as a form of income during crashes was highlighted during the 2008 financial crash. During an episode of mad money, throughout the height of the crash 2008 crash, Jim Cramer- the well known CNBC financial tv personality talked about the importance of safe dividends. He went on to say that there are plenty of good looking yields around but not all are safe. Cramer outlined that the risks were found in Cyclical companies and companies whose expected earnings for that year were not expecting at least double the annual dividend. Whatever your opinion may be on Cramer, he had a point here. Some companies did stand out and provided investors with regular payments, unaffected by the downturn.

S&P 500 divided aristocrats

These group of securities are 66 of the 500 companies within the S&P 500 index which have a record of 25+yrs of uninterrupted payouts to shareholders. A large group of these very companies proved themselves during the 2008 crisis.

Performance vs the S&P 500 

Historic performance of the S&P500. (Past performance is not indicative of future performance)

Sectors and payouts:

Some sectors held strong. Utilities and consumer staples, considered defensive sectors, managed to maintain payments, standing out from the rest. These companies provided stable cash flows and were less impacted by the turbulence.

If individuals can learn anything from the past one thing to consider would be to better position themselves by learning to evaluate the sustainability of dividends more critically. Shifting towards companies with stable cashflows, resilient and robust business models. At times markets have proven fragile, individual equities and their dividends don’t always have to be, due diligence is fundamental.

Hunting high yields:

The attraction to higher yields while looking for sustainable income appears to be a common theme. Things to consider would be- long term consistent payouts, bank interest rate rises which in turn could lead to a diminished dividend yield. Also, economic challenges and changes which could hammer certain sectors, a lack of profitability within a company leading to a significantly high payout ratio. Higher payout ratios can be a sign that the company may lack future growth.

With all the above considered, investors should tread carefully and look at the overall health of a company.

An example of a high yield stock which has a strong balance sheet and good cash flow would be monthly payer, Realty Income ticker- (NYSE:O) a real estate investment trust that has shown itself to be robust, shrugging off many detrimental factors during unforeseen market conditions. The corporation has consistently raised its payouts since its inception on the nyse in 1994. Currently yielding 6.08%, I am of the opinion that judging by the company’s previous performance, earnings and ability to hold firm throughout uncertainty, this trend will most likely continue making this stock a wise choice for investors.

The importance of diversifying:

Different sectors with low correlation with one another will provide greater protection during economic storms. A shield wall of diversified dividend stocks historically, has proved effective. Established, mature businesses paying out uninterrupted dividend income usually experience lower volatility during tough economic periods. Companies that grow their dividends, such as Procter & Gamble (PG), Johnson & Johnson (JNJ), and Colgate-Palmolive (CL)-historically have shown to provide stability and income.