Posted by Tim Stobbs on August 19, 2010
Depending on how closely you follow investment news you might have heard that Manitoba Telecom Services (MBT) cut it’s dividend from $0.65 down to $0.425 per quarter (or 35% cut). My wife owns that stock and as you might has guessed my initial reaction: S*%$!
At first I thought we only lost a little bit of income, until I realized I was looking only at a quarter not the year. Overall we lost $180 in dividend income and of course the share priced tanked as well. So you might think I’m still a little pissed off by this, but I’m not. Why?
Well I did a little math to realize even with the cut back wasn’t really that bad given my wife picked it up at a decent price. So even with the lower dividend her original investment is still yielding about 5%, which is acceptable to me. Both our portfolios carry a few high yield, but risky stocks so I fully expect a couple of them to cut back over the years. We are indexed for the majority of our investments so when this happens we don’t panic as these stocks are the high risk part of the portfolio.
When we go shopping for a stock I typically have a range of yields that I try to stay within which is 4 to 9%. Yes that is high, but this is the high risk part of the portfolio. As we age I’m going to drop down the range and seek to reduce the risk in that section of the portfolio. But for now we have over ten years horizon and I accept we might get burned once in a while. As long as after the reduction we are still within that range I’m ok with the reduction.
To ensure diversity we try to arrange it so no one stock provides more than $500/year in dividends or distributions. Thus limiting the damage a single stock can do to our investment income as MBT did. In the long term we are going to try and hold more than one company in a given sector and try to keep to sectors that typically see monthly billing to their customers like: banking (your mortgage), utility (power bill), or oil & gas (natural gas and gas for your car bills).
So that’s how we have setup some of our investments. Is it perfect? No! But it does function rather well over all for us. So have you been burned on a distribution or dividend cut? If so, did you keep it or sell it?