What Happens to Dividends in a Recession?

Every recession brings the same question from income investors: will the dividends hold? The honest answer from the last two is that most do, some do not, and which ones depends far more on the sector than on the headline yield. The two recessions also differed from each other in ways that matter for the next one.

The pattern: prices fall fast, dividends fall less

In a recession, share prices move first and furthest. Dividends move later and by less, because boards set them from earnings that have already been reported and cut them only when they must.

Two things stand out. In 2008 the dividend cut was about half the size of the price fall, and the income came back years before the prices did. In 2020 the United States barely moved while the United Kingdom and Europe cut hard, which is the second lesson: the damage depends on where and what you hold.

2008: the banks

The 2008 recession was a financial crisis, so the cuts landed on the sector at its centre. Banks paid roughly a fifth of all dividends in the United States and the United Kingdom before the crisis, and within eighteen months most of them had cut to near zero or suspended. Several large names that had raised their dividend for decades stopped in a single announcement.

Outside financials the picture was calmer. Consumer staples, healthcare, utilities and most industrials held or raised their dividends through 2009. An investor with no bank exposure saw a small dip. An investor whose income leaned on banks lost close to half of it.

The recovery was slow because the banks were slow: regulators kept payouts restricted for years. Index dividends did not regain their 2008 peak until 2012.

2020: the lockdown sectors, and the regulators

The 2020 recession was short and sharp, and the cuts followed the lockdowns. Airlines, hotels, cruise lines, restaurants, cinemas, shopping-centre landlords and the oil majors cut or suspended, because their revenue had stopped rather than slowed. Many of those cuts were the first in living memory for the company.

Then came a second wave that had nothing to do with revenue. Regulators in the United Kingdom and the eurozone told banks and insurers to suspend dividends as a precaution, whether or not they could afford them. That single instruction is most of the difference between the American and European rows in the table: US regulators capped bank dividends but did not stop them, so US index income fell a few percent while UK income fell by almost half.

The recovery was fast for the same reason. The suspended payments were restored as the restrictions lifted, and by 2022 most markets were back at or above their 2019 payout.

Which sectors cut, and which did not

Across both recessions the sectors sort into three groups.

The first group is the reason a diversified income portfolio does not collapse in a recession. The third group is the reason a concentrated one can.

Why your dividend got cut

If one of your holdings cut, it was almost always one of four situations:

1. Revenue stopped, not slowed. A lockdown sector in 2020. No dividend survives a quarter with no sales.
2. The payout was stretched going in. A payout ratio above 80 percent or a dividend not covered by free cash flow leaves no buffer. The recession takes the buffer that was not there.
3. Debt came first. Lenders and rating agencies are paid before shareholders. A company that needed to protect its credit rating cut the dividend to do it.
4. A regulator said so. European banks and insurers in 2020. Nothing about the company's own numbers.

Situations two and three were visible in the accounts a year before the cut. Situation one was visible in the sector. Only the fourth came without warning.

What to do before the next one

You cannot know when the next recession starts. You can decide, now, how much of your income sits in the third group.

• Cap the sector. No more than 20 to 25 percent of your dividend income from any one sector, and count banks, energy and travel with extra care.
• Cap the holding. No single company paying more than 5 percent of your total dividends. One suspension then costs you a twentieth, not a fifth.
• Check the cover. Payout ratio under 60 percent and free cash flow that covers the dividend, on every holding, once a year.
• Keep a buffer. One year of spending in cash, or a portfolio that pays 10 to 15 percent more than you need, so a cut never forces a sale at the bottom.
• Do not sell the survivors. The consumer staples and healthcare names that held their dividend through 2009 and 2020 were the ones that went on to raise it. Selling them in the panic locks in the price fall and gives up the income that was never at risk.

These are the same rules that make a portfolio safe in ordinary years. A recession is when you find out whether you followed them.

Watching it in your own portfolio

The rules above are about income by sector and by holding, and that is a number your broker does not show you. It shows a list of positions and their prices. What you need in a recession is your dividend income split by sector, the share of it that each holding pays, and a flag the day one of them cuts.

A portfolio tracker such as Cadances reports exactly that across every broker you use: the income split by sector, country and currency, the top payers and their share of the total, allocation rules that read near or breached when a sector grows past the limit you set, and an alert when a holding cuts or raises its dividend. The recession will do what it does. Knowing your exposure before it starts is the part you control.

Questions people ask

Do all companies cut dividends in a recession?

No. In 2008 and in 2020 most companies outside the sectors at the centre of the crisis held or raised their dividend. Cuts were concentrated in banks in 2008 and in travel, leisure, energy and European financials in 2020.

How much did dividends fall in 2008?

US index dividends per share fell by about a quarter from their 2008 peak to the 2010 trough, and regained the peak in 2012. Share prices fell about twice as far and took longer to recover.

Are dividend stocks safer than growth stocks in a recession?

Their prices fall too, usually by less, and their income falls by much less than their price. An investor who lives on the dividends rather than on sales of shares is less exposed to the price fall, which is the practical advantage.

Which dividend stocks are recession proof?

None are guaranteed, but consumer staples, healthcare, utilities and regulated telecoms have held their dividends through the last two recessions far more often than any other sector, because demand for what they sell does not fall much when the economy does.

Should I buy dividend stocks during a recession?

A recession puts the survivors on sale: the same dividend at a lower price means a higher starting yield. The check is whether the dividend is covered and the sector is in the first group above. A high yield in a company that is about to cut is the trap, not the opportunity.