Paul's Insights: What happens when dividends dive?

I’ve always been a big fan of equities. Shares give you a stake in a business, and that means a chance to earn a slice of its profits through dividend income. But dividends are not set in cement, and in the current turbulent times, this is becoming very clear to investors. 

A number of listed companies have announced plans to scrap or defer dividend payments. Westpac won’t be paying a dividend in June, and Qantas and Bank of Queensland have both deferred their dividend payments. Insurance industry heavyweight IAG, has cautioned that it currently has “limited scope” to pay a final dividend in September 2020.

Not every company is pegging back its dividends. However, for those that are significantly impacted by COVID-19, it can make good business sense to shore up cash resources, leaving the company better placed to navigate the present tough times.

I have often pointed out that dividends are not guaranteed. This can highlight the value of adopting a ‘total returns’ strategy in your portfolio rather than just focusing on income-generating investments. However, this doesn’t solve the immediate problem of a lower income for retirees who rely heavily on dividends as part of their household income.

There is no easy solution. It’s certainly worth revisiting your household budget to see where spending can be adjusted, but beyond this, part of the answer may lie within your investment portfolio.

I understand that retirees can have deep-seated fears about out-living their money, and as a result try to avoid dipping into their capital at all costs. As a guide, research by the CSIRO[1] found that retirees with super savings topping $100,000, typically invest their nest egg in an account-based pension. These account holders tend to stick close to the minimum allowable drawdowns, and by doing so, many pass away with substantial amounts of their nest egg unspent.

Yes, it pays to be mindful of not exhausting your retirement savings early on. But the COVID-19 crisis is primarily a health issue, and seniors are among the most vulnerable members of our community. So it’s a real concern that retirees may start to lead an unnecessarily frugal lifestyle – and potentially compromise their health, just to preserve their capital.

Your money is no good to you if you can’t enjoy. Right now, could be the time to use the money you’ve worked so hard to build up, to continue leading a comfortable lifestyle that lets you maintain good health.

[1] Superannuation drawdown beheaviour: An anaylsis of longitudinal data

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.