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Retirees have long depended on dividend stocks for a reason: The payouts show up whether or not you sell a single share.
Unfortunately, that plan is now getting harder to pull off because the S&P 500's dividend yield has been running just above 1%, the lowest reading on record, according to Charlie Bilello, chief market strategist at Creative Planning (1).
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The payouts themselves haven't shrunk, but yield is dividends measured against price and prices have climbed far faster than payouts. The index crossed 7,700 for the first time in early August and because it weighs companies by market value, it now leans heavily on megacap tech names that pay little or nothing (2).
Steven Yedlin, a 75-year-old retired doctor in East Grand Rapids, Mich., has witnessed this firsthand. He told the Wall Street Journal (WSJ) that he built his portfolio around dividend ETFs and by the time he stopped working, his taxable account was split evenly between dividend funds and S&P 500 index funds (3).
"Not much you can do about the yields," Yedlin said.
What he could do was change where the money goes. He shut off automatic reinvestment and the payouts now land in high-yield money-market funds — or he gives them to his kids.
Dividends can disappear overnight
Papa John's and UWM Holdings proved this possibility within two days of each other last week, scrapping their payouts. A dividend will last only as long as the board allows.
The pizza chain told the SEC on Aug. 6 that its board voted to suspend the quarterly dividend beginning in the third quarter, redirecting the cash toward franchise incentives, new point-of-sale technology and supply chain work (4). And looking closely, you'll see that the decision came out of a rough quarter — revenue fell 8.8% to $482.4 million and North America comparable sales dropped 8.3% — with CEO Todd Penegor conceding the turnaround is "taking longer than anticipated" (5). The board says it will revisit dividends and buybacks once the strategy delivers.