Write rules for what to do with your dividends and what to do when a dividend is cut.
Darren, an income investor, had no rules when two of his holdings cut their dividends. He sold the first one and bought more of the second, and he made neither choice with a clear head.
The day of the announcement is the worst moment to make up your mind. The share price has just dropped, people on the forums are arguing, and your instinct pulls you toward one of two moves: get out before it gets worse, or pick up more while it looks cheap. You avoid that by settling your rules on a quiet day, when none of your holdings is in the news. An income portfolio needs four: a reinvesting rule, a spending rule, a cut rule and a topping-up rule. Darren eventually wrote his four down ahead of time. They now fit on an index card that he keeps next to his brokerage login.
This rule covers the building years, before you start drawing income. Each dividend lands in your account as cash, and that cash goes to whichever holding sits furthest below its target weight. Target weight is the share of the portfolio you planned for a holding. You compare each holding's current weight against it.
Each period, gather the dividend cash and set every holding's current weight beside its target. Rule out any holding that failed a yield trap check and has not been checked again since. That holding receives no reinvested money until the check has been rerun. The cash goes to whichever remaining holding has the biggest shortfall.
Take a portfolio of five holdings that pays out S$600 of dividends this quarter (example figures). One holding is a REIT making up 15% of the portfolio against a 20% target, a gap of 5 points. Another is a bank stock at 28% against a 25% target, 3 points over. The REIT receives the S$600. The bank gets none of it because it is overweight, and the holding that happened to pay you the most in dividends gets none either.
Because you are always buying whatever has slipped in weight, the portfolio stays near its plan and you never have to sell to keep it there. The course "Build and run an ETF portfolio" uses the same approach for funds, where it is called rebalancing with new contributions.
Once the portfolio is paying your bills, you spend recurring income and keep one-off payouts invested. Recurring income means interim dividends, final dividends and the operating portion of a REIT distribution. One-off payouts means special dividends and capital distributions.
A special dividend or a capital distribution puts real money in your account. If you treat it as income, though, you end up budgeting around cash that will not arrive again. The following year you have to choose between spending less and selling holdings to make up the difference. Putting one-offs back into the portfolio keeps your regular income at the level your plan was built on. Lesson 3.3, "One-offs, specials and payouts that will not repeat", goes through the reasons in more detail.
When a payout arrives, look up its label on SGXNet. You can spend an interim dividend, a final dividend or the operating part of a REIT distribution. A special dividend or capital distribution goes into the holding furthest below target, using the same method as rule one.
A cut does not automatically mean you should sell. Some cuts point to a business in decline, while others are a sensible decision by the board to protect the company. Lesson 2.3, "Dividend growth and what it says about the business", explains the difference. What happens after the cut tells you more than the cut itself, so this rule is a set of steps with a deadline attached.
On the day of the announcement, you place no trades. You set a fixed window for finishing the work, for example two weeks after the announcement. Within that window you rerun the yield trap check from Lesson 3.4, "Run the yield trap check on a high yielder", using the updated figures:
price trend recurring yield payout cover debt management's statements
If the holding is a REIT, you also update its line on the REIT scorecard from Lesson 5.5. The check ends in one of three verdicts (pass, fail, or more evidence needed), and you then act on that verdict. The window does two jobs: it prevents a same-day reaction, and it stops you putting the check off for months.
Never add to a holding just because its yield has gone up after a fall in price. This is the rule that protects you from the yield trap itself. When the yield climbs because the price is falling, the market is often expecting a cut, as Lesson 3.1, "How a high yield turns into a loss", shows. Adding money at that point increases your stake when the risk is highest, and the decision rests on a backward-looking number.
You can still buy more of a holding whose price has dropped, as long as the yield is not your reason. Before you add, check honestly that the higher yield is not what is drawing you in. Rerun the yield trap check. Go ahead only if the holding passes and is below its target weight.
Each rule should be a single sentence, specific enough that you can follow it on a bad day with little room to argue with yourself. Vague wording gives way under pressure. "Review my holdings when needed" is vague because it does not say when you review or what you do afterwards. A rule that holds up looks like this: when any holding announces a dividend cut, rerun the yield trap check within two weeks and make no trade until it is done.
Some time after writing his card, Darren broke one of his own rules and wrote down his reasons. Writing those reasons down taught him more than following the rule would have.
Now write your own four rules, one each for reinvesting, spending, cuts and topping up. Keep each one to a single sentence, in words you would be willing to hold yourself to on the morning of a cut.
Write four one-sentence rules for your income portfolio: one each for reinvesting, spending, cuts and topping up.
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