Dividends look safe, until they're not

Published June 19, 2010

Wealth insights
(New York)

"BP will suspend its dividends for the rest of the year and set aside money for cleanup costs and the compensation of workers who have lost income because of the oil spill."


Createwealth8888: Black Swan event can happen anytime and anywhere to any company.

The moral of the story, as always, is to diversify within each asset class you own, the more sources the better

Nothing is forever

This should have been a warning for anyone making big retirement bets on a single stock or a handful of stocks. Things that seem stable can wobble and collapse before our very eyes. And now it's happening again.

It's not supposed to work this way, at least in the minds of the many investors of the old school. To them, a stock that pays a dividend is a stock that is safe. 'It told them that a company was still around and operating, it was in good health,' said Milo M Benningfield, a San Francisco financial planner.

Just because a company pays a dividend now is no guarantee that it will forever, or that the company will even continue to exist. Nor is it any guarantee that the underlying stock is stable.

Everyone needs income in retirement, and dividends aren't a bad way to get it as long as they don't come from a single company. Again and again, we've seen out-of-nowhere scandals and crises and accidents bring big companies to their knees. Why, given the overwhelming evidence that these things do happen once in a while, would you not extract your dividend income from a low-cost, broadly diversified mutual fund that specialises in dividends?

The moral of the story, as always, is to diversify within each asset class you own, whether it's dividend-paying stocks or municipal bonds or the emerging-market countries where you're rolling the dice in search of big gains. Then, diversify your retirement income strategy, too. The more sources the better, whether it's dividend income, interest income, annuity income, rental income or periodic (and tax-savvy) outright sales of stocks or other assets.

Even this sort of diversification might not have protected you from the pain in 2008. But it can shield you from the ruin of betting too heavily on a single security like BP

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Createwealth8888: When you realize that dividends don't look safe anymore; it is often too late to do anything as the stock price may have plunged far below your initial purchase.