Where Did the Dividends Go?

One of the most frustrating things about the current market downturn is that it is affecting a wide range of financial areas. Most of the focus has been on net worth due to the fall in the stock market and housing prices.  The Federal Reserve estimated that US household networth plunged by $5.1 trillion in the fourth quarter of last year alone.  This plunge in net worth is affecting neighborhoods, delaying retirement plans and forcing many families to cutback on spending.

In addition to declines in net worth, cash flow drops are also problematic. Interest rates on bank CDs and savings accounts have dropped rapidly with 12-month CD rates dipping below 1% at many banks.  Dividends have also dropped.  When I looked at the dividend rate for Q1 2009, compared to last year, dividend payments have decreased as companies are conserving cash with some eliminating dividends entirely.  For investors (like me) who are trying to structure an investment portfolio with more stable dividend payments, the drop in interest rates and dividend rates creates huge problems in cash flow planning. Here’s what I am (or will be doing):

–Look at bond funds and balanced funds — although short-term interest rates have dropped dramatically, the yield on bond funds, especially bond funds with corporate bonds, and balanced funds has been more stable.  Be sure the composition of the balanced fund has the stock/bond ratio that you are looking for.

–For bank CDs, study the rates that your bank will give, often banks will have a better rate at a specific maturity or a specific dollar amount.  For example, my bank had 7-month CDs at a much better rate than 6-month, and the rate steps up substantially for amounts over $10,000.

–Scrutinize fees closely on money market funds and mutual funds.  If your fund charges 0.5%, this hurts much more when rates are at 1% instead of 5%.

–Finally, avoid making huge changes to your portfolio for a small increase in yield. I have found these rarely pay off and the reach for yield should not become a reach for excess risk.

see more at this week’s Carnival of Personal Finance