Broker Check
Don't Bet Your Retirement on Dividends

Don't Bet Your Retirement on Dividends

November 30, 2020
Share |

Many investors view dividend payouts as a reliable source of income.  Retirees in particular prize dividend-paying stocks for their cash flows that can replace a regular paycheck when they're no longer working. However, those expecting to receive consistent dividend income may have been surprised to see lower-than-expected dividend payouts following the onset of the coronavirus pandemic, when both market volatility and market declines were extraordinary. In reality, recent and historical data show that changes in dividend policy are common, especially during times of higher uncertainty.

Aggregate dividend payouts fell meaningfully in the first three quarters of 2020 compared to the same period in 2019. Exhibit 1 shows the dividends earned from a hypothetical $1 million investment in US, developed ex US, and emerging markets in both periods. Developed ex US markets showed the most drastic change with a 41% decrease. Dividend payments in emerging markets decreased by 29% and in US markets by 22%.

Globally, large firms have historically had the highest propensity to offer dividend payouts,1but even successful, established firms were not immune to the economic consequences of a global pandemic. A few examples help illustrate this point. Harley Davidson (HOG) has been paying dividends to shareholders since the 1990s. In April 2020, the motorcycle manufacturer slashed its dividend from $0.38 per share to just $0.02, a 95% decrease.2 Gap Inc. (GPS) suspended its dividend payments until at least April 20213 after the economic downturn left the clothing brand with particularly poor revenues.

Harley Davidson and Gap were not the only firms to change their dividend policies. As shown in Exhibit 2, 38% of firms in global markets (2,584 companies) that were expected to pay dividends, consistent with their payout history, instead decreased, omitted, or eliminated their dividend payments in the second quarter, more than doubling the 1,248 firms that made similar changes to their dividend policy in the first quarter of the year. The trend continued into the third quarter: 2,699 firms made such changes.

While these dividend cuts may come as a surprise to some investors, history buffs may recall that, in 2009, Harley Davidson announced it was cutting dividend payouts from $0.33 per share to $0.10, a 70% decrease.4 In fact, during the Great Recession, significant changes to firms’ dividend policies spiked throughout global markets. Exhibit 3 displays Fama/French global market returns for 1991–2019 with a one-year lag and the proportion of dividend-paying firms that eliminated or decreased their dividend payouts. In 2008, for example, the global market was down more than 40%, and, the following year, many firms made changes to their dividend policies. The historical correlation between global market returns and dividends that are eliminated or decreased may suggest that firms are more likely to alter their dividend payouts during times of market instability.

The first three quarters of 2020 remind us that dividend payouts can be inconsistent, particularly in volatile markets. Hence, investment strategies that focus on income derived from dividends may not serve investors who need a steady income stream and, moreover, might not be the most effective way to pursue long-term wealth growth. A more reliable approach is to structure an asset allocation around the characteristics that academic research has found to drive expected returns: smaller cap, lower priced, and higher profitability stocks, as well as interest rate (maturity) and credit exposure in bonds, while also maintaining broad diversification across names, sectors, and countries within stocks and bonds.  

Where then, does the ongoing "income" come from in a diversified and balanced portfolio?  That depends.  During bull markets, investors can sell appreciated stock shares for cash flow.  During bear markets, bond sales offer an alternative to stocks, as they don't tend to decline in tandem with stocks, and in many cases appreciate temporarily when stocks decline.  What's more, holding a well-diversified and balanced portfolio to generate income prevents you from having to forecast what will happen next in the markets or to any particular company.  Diversified stock and bond portfolios offer a cash flow solution for a variety of different environments, and are dependent on broad-based economic growth and not the outsized success of any one organization.  That's a wager worth betting your retirement on.


  1. Stanley Black, “Global Dividend-Paying Stocks: A Recent History” (white paper, Dimensional Fund Advisors, March 2013).

  2. Harley-Davidson, Inc., “Dividends & Stock Splits,”

  3. Gap Inc., “Gap Inc. Provides Update In Response To Covid-19 Outbreak,” news release, March 26, 2020,

  4. Harley-Davidson, Inc., “Dividends & Stock Splits.”


The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or, representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by the Issuing Entity to be reliable and the Issuing Entity has reasonable grounds to believe that all factual information herein is true as at the date of this document. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorised reproduction or transmitting of this material is strictly prohibited. The Issuing Entity does not accept responsibility for loss arising from the use of the information contained herein.

This article was originally supplied by Dimensional Fund Advisors with modest changes by Servo Wealth Management.