Do you rely on your investments to deliver an income? If you do, the last year could have severely affected your income and may mean you’ve been forced to rely on other assets. As 2021 continues to present challenges for businesses around the world, can you still rely on your investments?
Traditionally, dividend-paying stocks have played an essential role in investment portfolios designed to deliver an income. A dividend is when a company distributes some of its earnings to shareholders, usually in cash. Dividends are usually paid by large, established companies that have relatively predictable profits. This means that investors can be relatively confident in their income. However, there are no guarantees and companies can decide to slash or suspend dividends.
So, what’s changed for income investors?
The last year has put a huge strain on businesses around the world as the pandemic affected their operations and profits. This meant that some companies choose to reduce or halt dividend payments. If you relied on these as part of your income, it could have had an impact on your lifestyle and plans.
While restrictions are beginning to lift, companies still face challenges and it’s likely to affect investors that hold stock in dividend-paying companies. According to a report in City Wire, UK dividend growth forecasts for 2021 have been slashed by almost a third from the start of the year. Between January and March this year, dividend payments shrank by 26.7% when compared to a year earlier, by a total of £12.7 billion.
Some well-known companies, like BT, EasyJet, and Associated British Foods, which owns Primark, reduced dividends. While experts expect dividends to pick up in the coming months, it’s predicted they will still be below pre-pandemic levels. It’s expected, for instance, that bank dividends will be between 25% and 40% lower than usual throughout 2021.
For those investing for income, it could mean your income is affected for long after the UK returns to normal, but that doesn’t mean you can’t still take an income from your investments.
4 steps to take if you invest for income
If dividends falling in the last year has affected your income, here are four steps to take now.
1. Review your finances
The first step to take is to review the impact the last year may have had on your finances. The pandemic may have affected other areas too, including changes to your lifestyle and goal. Reviewing your dividends in the context of your wider financial plan can help you make decisions that make sense for you. If you’d like to review your finances, please get in touch.
2. Check your emergency fund
It’s recommended that you have an emergency fund. Having three to six months’ worth of expenses in accessible cash can help ensure your day-to-day life isn’t affected if your income temporarily stops or falls. Over the last year, you may have dipped into savings or other assets to make up a shortfall. Where possible, you should replenish your emergency fund to provide long-term financial security if the unexpected happens.
3. Don’t panic, and keep a long-term view of dividends
If your dividend-paying investments have been affected in the last year, don’t make knee-jerk decisions. 2020 was unprecedented in many ways for businesses and suspended dividends don’t mean a company is in trouble. While it may take some time, it’s expected that dividends will return to normal eventually. As with all investments, have a long-term view before you make any decisions about selling stocks you hold.
4. Withdraw investment returns
Dividend-paying companies aren’t the only way to earn an income from investments. Withdrawing investment returns, rather than reinvesting them, can help create an income too. While you can’t guarantee returns, a diversified portfolio that’s aligned with your risk profile can be a useful way to deliver an income. You also need to be aware of the withdrawals you make and market conditions. Withdrawing a lump following a dip in performance, for example, could have a larger impact than you expect on your portfolio.
There’s no one size fits all solution for building an investment portfolio that delivers an income. Your portfolio should reflect your goals and financial situation. If you’d like to discuss how you can create a passive income from investments, whether you’re thinking about the future or want to create an income stream now, we’re here to help you. Please give us a call to discuss your investments.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.