Dividend cut calculator

What the cut does to your income

Annual income is shares times the yearly dividend per share. A quarterly or monthly payment gets multiplied up to a year first. The cut then takes its percentage off that total. Yield on cost is the new yearly dividend per share over the price you paid, which makes it a measure of what your original money earns now. Then comes replacement. Fresh capital, invested at the yield you enter, would have to pay the income you lost, so the sum is lost income divided by that yield. A cut rarely arrives from nowhere, and the slide toward one usually shows up in the dividend coverage ratio for a year or two before the board acts, as earnings fall toward the payout and then below it.

A worked example on the defaults

You own 1,000 shares of a hypothetical company that pays $2.00 a year, bought at $40. Income is $2,000 a year and your yield on cost is 5.00%. The board halves the dividend. Income drops to $1,000, and yield on cost falls to 2.50%. Replacing the missing $1,000 at a 4% yield takes $25,000 of new money. That is 62.5% of the $40,000 you put into the original position. Not many portfolios have that much cash sitting idle, so the fixes tend to be slower: the remaining dividends go toward other payers, part of the position moves, or you accept less income for a while. Replacing lost dividend income after a cut goes through those options with the same numbers.

What to check on the quote page

The yield on a quote page is usually trailing. It is built from the payments made over the past year, so for months after a cut it can still show the old, higher figure. Take the declared amount of the latest payment and multiply it up to a year. Be as hard on a generous replacement yield as on the stock that just cut. A high yield often means the market doubts the payout. Monthly and quarterly payers can carry the same annual yield, as the comparison of monthly and quarterly dividend stocks sets out, so enter the frequency the company actually uses. Building around the possibility of the next cut, spread across enough payers that one of them halving is survivable, is the idea behind planning an income portfolio around the next dividend cut.