One of the most important things to remember about stock dividends is that they are not guaranteed. It seems almost as though you have a right to dividends, but you don’t. Stock dividends are, in fact, something extra – a nice perk for shareholders.
Companies Decide Whether to Pay Dividends
The board of directors for a company choose whether or not to pay dividends. Many companies feel that regular pay outs are a good idea, since dividends can attract a certain type of investor. And, of course, companies benefit when investors put money into their operations. However, it is vital to remember, even as you build an income portfolio for stable cash flow, that companies can decide to stop paying dividends.
In some cases, a company may decide to cut the dividend rather than stop paying it altogether. A dividend is a share of the company’s profits. If a company has seen a drop in revenue, or wants to finance a major acquisition, the board of directors may decide to reduce the payout. This leaves more of the money for the company to do what it wants. You still benefit from stock price increases, but you may not get the dividend income that you expect.
Protecting Your Dividend Portfolio
Because dividends are not guaranteed, it is a good idea to protect your income portfolio from dividend cuts. You can create a relatively stable cash flow with the help of dividend paying stocks, but you still need to be prepared for cuts. Some of the things you can do to help protect yourself against dividend cuts include:
• Company diversity: Don’t rely solely on the dividends from a single company, or from a variety of companies in a single industry. Look for different dividend stocks from different industries so that your dividend income won’t be completely decimated by difficulties affecting one company or industry.
• Income diversity: While dividend stocks can make a great income source, you should consider cultivating other income streams. Include bonds and P2P lending in your income portfolio (provided you have the right risk tolerance). You can also look for other passive income streams online or from royalties.
The key to be diverse enough in your income so that the reduction in one source won’t completely cause problems. You might even consider maintaining a part-time job or doing some freelancing or consulting work to make sure have a relatively stable base of income.
Dividend stocks are a great investment in many cases, but you do have to remember that your payouts aren’t guaranteed, and plan accordingly.