Dividend Cuts - Managing Their Impact On Our 'Income Factory'

Published Mon, 21 May 2018 12:02:10 -0400 on Seeking Alpha

A reader recently asked me how I react to dividend cuts in the funds I own. While my answer (linked here) wasn't bad, the question prompted me to think about the subject more seriously and try to come up with a more thoughtful response.
My goal, long term, is to earn an "equity return" of plus or minus 10% per annum. My main strategy for achieving that goal is to invest in high yielding asset classes where I can collect the entire return in cash and then create my own "income growth" by reinvesting and compounding the cash distributions. In other words, I am not counting on growth of a particular security's distributions to provide my portfolio's income growth, but will create it myself through reinvestment and compounding.
Under the "rule of 72" I will then double and re-double my income stream every 7 years (i.e. 72 divided by 10 is 7). Obviously if I only manage to achieve a 9% cash return and my income only doubles every 8 years instead of 7 years, that's not terrible. Nor would an 8% return that only doubled every 9 years, for that matter. If I hit the jackpot and manage to achieve an 11% or even higher yield, and my income doubles every 6 years or so, that would be great. In fact, I will probably never hit and keep a steady 10% distribution yield, but will be totally content if I can keep it in the overall range of 9% or higher.
As we discuss later, "high yield" is relative to the underlying macro-economic... Read more