General Electric announced Monday it will be cutting its dividend payment in half, from 24 cents a share to 12 cents a share. If you buy stocks for income, chances are this is big news. General Electric is one of the most widely-held stocks on Wall Street, and Monday was only the second time since 1899 GE has cut its payout. Many investors, especially those who rely on dividends to maintain their lifestyles, are going to feel a significant pinch in their wallets. Now we face the question about what to do next. I'll share a few well-established wealth management principles that might help guide your next steps.
The day after GE announced its cut to its dividend along with a comprehensive restructuring, the stock dropped close to 6 percent. But the stock had been falling well before that; it was close to $32 per share towards the close of last year. During the same period, the S&P 500 Dividend Aristocrat Index—a group of stocks within the S&P 500 that have raised their dividends each of the past 25 years—increased by about 11.5 percent. That is why diversification is so important. Even if your portfolio already was hit from holding a big position in GE, review it again to make sure you are minimizing the potential impact of more bad news to yet another concentrated position.
Regardless of how tempting it might be to buy higher-yielding investments to make up for the income loss after GE's cut, don't be a yield chaser. A yield chaser chooses investments primarily on what they are paying now instead of watching total return and risk. Yield chasers are prone to end up with high-risk portfolios that pile up sudden and heavy losses. But what you can do is methodically examine your holdings to see if there might be higher-yielding stocks with similar risk levels. Make sure you consider capital gain taxes (which you might be able to offset) and trading costs before making the switch, though.
Though this is a more dramatic step than swapping a few stocks, now might be the time to think about moving from a strictly stock income strategy to a total return strategy. Total return investors can create their income streams by systematically withdrawing funds from both income and capital. If you have enough capital, your withdrawals may be less than what you make through total return. Mutual funds can be set up to withdraw money automatically. If that interests you, speak with an experienced financial professional. He or she should have financial planning software that can combine projected rates of return, historical volatility and your desired withdrawals to estimate how long your principal would last and the probability of your need outlasting your principal.
Tempting as it might be to blame GE management or how the company is positioned in today's global economy, most successful stock fund managers would tell you investing is less a stock picker's game and more of a risk management game. If behemoth-sized General Electric felt the need to cut its dividend, then we should lick any wounds we have and focus on what might be next.
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Robert W. Baird- Sarasota, FL
