Investors clinging to their Walgreens Boots Alliance shares got some bad news on the income front last week as the pharmacy chain suspended its dividend . The move comes about a year after Walgreens slashed its dividend roughly in half. It’s been a rough go for the pharmacy chain. Shares have tanked 56% in the past 12 months as Walgreens contends with declining reimbursement rates for prescription drugs and softening consumer spending . WBA 1Y mountain Walgreens Boots Alliance in the past 12 months “With the stock at $11 and WBA facing other obligations, it seemed pretty obvious that a meaningful cut was coming,” wrote Don Bilson, head of Gordon Haskett’s event-driven research team, in a Jan. 31 report. “What might not have been expected was an outright suspension.” Companies can reinstate dividends. Most of the 43 S & P 500 names that halted payments during Covid have since resumed them, according to Howard Silverblatt, senior index analyst, product management, at S & P Global. However, when such an action occurs, shareholders have a tough call to make. “Once you hit the point where the dividend is suspended, you have to decide what your priority is from an investment standpoint,” said Kim Abmeyer, CFP and CFA at Abmeyer Wealth Management in Dallas. “If income is your main objective, you probably should cut bait and move on,” she said. Looking for red flags For investors, a dividend suspension is typically the last red flag in a series of warnings. “Suspending your dividend is the last thing you do, and it usually means you have a cash-flow problem,” Silverblatt said. The upshot in the short term? “The company has admitted that they have a problem and are taking the difficult action to address it,” he said, noting that it’s not unusual for a company’s stock to rise on the announcement. High dividend yields and a deterioration in cash flow are some of the flashing signs for investors to watch for, Silverblatt said. The former may suggest that the share price is tumbling, while the latter could offer insight on the sustainability of the dividend payment. Headlines are also an indicator for investors, and a company that’s making the news for the wrong reasons should spur investors to take a step back, said Abmeyer. To that end, she parted ways with Intel after the company announced last August that it would suspend its dividend. Shares of the chipmaker have slid 55% in the past 12 months. INTC 1Y mountain Intel shares in the past year “It was one of the things that kept many investors holding on for the longest time: As long as the dividend gets paid, it can help you ride out the storm from a return standpoint,” Abmeyer said. “If there is no light at the end of the tunnel, cut your losses and return to your original investment objective.” How an income investor should respond to a dividend suspension from a portfolio perspective will depend on their strategy and goals. “We wouldn’t necessarily immediately replace one stock with another just for the sake of maintaining yield,” said Ashton Lawrence, CFP and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina. “Instead, we reassess the broader income strategy.” That could mean diversifying across other high-quality dividend payers, integrating alternative income sources like structured notes or bonds, or shifting toward a total return approach where capital appreciation complements income needs, he said. Start with the right names Head off trouble by performing solid due diligence on your dividend payers before you buy them. In addition to the strength of the balance sheet and the free cash flow, investors should also dig into the consistency of a company’s earnings and understand its dividend payout ratio. “A high payout ratio, for example, can be a red flag if a company is paying out most of its earnings in dividends with little cushion for economic downturns,” Lawrence said. Other factors he considers include the company’s positioning within its industry, its debt levels and history of dividend growth. “Companies with a strong track record of growing dividends through different market cycles are often more resilient,” he said. Diversifying across an array of dividend payers through an ETF also helps. Consider the S & P 500 Dividend Aristocrats ETF (NOBL) , made up of names that have grown their dividends for at least 25 years. Household names have made the cut, including big box retailer Walmart , tech stalwart IBM and soft drinks giant Coca-Cola . “Take a step back and realize that this speaks to the importance of having that diversified portfolio,” said Lawrence. “Be it income from bonds, dividends, income notes, you still get that income stream.”
