How much income do you lose when one stock cuts its dividend?

Multiply the holding's annual dividend by the size of the cut. In a portfolio of 20 equal holdings each paying $800 a year, one holding halving its payout costs $400 a year, or 2.5% of total income, before any change in its share price.

What should you do after a dividend cut?

Read why the company cut, check its dividend coverage and balance sheet, and decide whether the reason to own it still holds. If not, selling and moving the money into a holding with a covered dividend can rebuild part of the income, though a fallen share price means less money to reinvest.

How big should a cash reserve be for dividend income?

Enough to cover the shortfall from the cut you planned for while the income is rebuilt. Setting spending at the income left after one assumed cut means a year with no cut adds the difference to the reserve, so the cushion builds on its own.

Plan an Income Portfolio Around the Next Dividend Cut

The projected annual income line on the brokerage statement reads $16,000. It is easy to treat that figure as a salary. It is an estimate built from the last dividend each company declared, and every one of those dividends is a board decision that can be revisited at the next meeting.

A cut somewhere is the ordinary case

Any single company may go decades without cutting. Hold twenty of them for twenty years and you are exposed to hundreds of separate dividend decisions, made by boards facing recessions, lawsuits, acquisitions, debt coming due and a change in chief executive, and it would be strange if every one of those decisions went your way. Somewhere in the portfolio, a cut is the ordinary case.

So plan for one every year. A budget that assumes one never needs rewriting.

The cut itself is easy to see after the fact. It shows up as a smaller amount on the next declaration, and as a step down in the company’s dividend history table. What the history cannot show is the next one. That is why the planning goes into the budget, where it costs nothing until it is needed.

The sum on a $400,000 portfolio

A hypothetical portfolio holds $400,000 in 20 equal positions of $20,000 each, yielding 4%. One holding halves its dividend, and its share price falls 30% on the news.

The income hit is small. The price hit is bigger: $6,000, against $400 a year. It also lingers.

Why the price hit matters for the income

Selling the cut holding and buying a 4% payer sounds like a repair. Run it. The $14,000 left buys $560 a year at 4%, where the original $20,000 paid $800, and with the other 19 holdings still paying $15,200 between them, income comes back only to $15,760. That is $240 short.

That gap stays until the portfolio earns back the lost capital. A cut costs you twice, and the second cost is the one the income line never shows, because the brokerage statement will happily report a projected $15,760 as though the $6,000 that disappeared on the day of the announcement had never been part of the plan at all.

The screener’s yield column can make this worse before it happens. Suppose the price slides 30% first and the cut comes later. For a while, the old $800 dividend over a $14,000 position shows as a 5.7% yield, the highest in the portfolio. It looks like the best holding. After the cut it yields about 2.9%.

The dividend cut calculator runs both effects on your own holdings.

Budget from the income after one cut

The rule is short. Set spending from the income that remains after one assumed cut, and keep the difference as a reserve.

On the portfolio above, that means spending $15,600. In a year with no cut, $400 goes to the reserve. In a year with a cut, spending does not change. The reserve covers anything past the one cut you planned for. Two cuts in a year cost $800 of income, so the reserve pays the second $400 while the portfolio is rebuilt.

Five years without a cut put $2,000 in the reserve. That pays a single $400 shortfall for five years, which is time enough to sell the weak holding, move the money into a payer whose dividend is covered, and let the income climb back most of the way without a single month of changed spending.

Rebuilding has its own steps: read why the company cut, decide whether it still belongs, and replace it with a holding whose dividend is covered by earnings or cash flow. The walkthrough on replacing lost dividend income after a cut goes through them in order.

The strongest objection: careful selection avoids cuts

This is the natural objection. Buy companies with covered dividends, long payment records, strong balance sheets and steady businesses, and cuts become rare.

Rarer, yes, and never absent. Careful selection lowers the odds, and that is worth doing, but a company with a long record of raising its dividend is still one bad year or one lawsuit from a board that decides the cash is needed elsewhere. A plan that needs zero cuts is fragile. It works right up until the first one, and then the spending has to change at the same moment the portfolio has lost value, which is a bad time to be rewriting a budget.

Selection and the budget rule do different jobs. Selection makes the cut less likely. The budget makes it survivable.

Where the plan needs changing: the concentrated portfolio

The one-cut rule assumes many holdings. Concentration breaks it. Put the same $400,000 in 5 holdings of $80,000 each and every holding pays $3,200 a year. One halving costs $1,600, which is 10% of the $16,000, four times the shortfall of the 20-stock version. A 30% price fall there costs $24,000 more.

A concentrated income portfolio needs a plan for each holding: a larger reserve, a spending figure set after the cut of the weakest-covered name, or more holdings. More on building income that holds up is in the dividends hub. For a spread portfolio, the rule stands as written. Spend the income after one cut, and let the good years fill the reserve.