You will be able to write rules for what to do with dividends and what to do when one is cut.
The day a holding cuts its dividend is the worst day to decide what to do about it. The price has just dropped, the forums are loud, and every instinct pulls one way or the other: sell before it gets worse, or buy more now that it is cheap. Darren had done both at different times, and neither decision had been made with a clear head.
So he wrote his rules down in advance, when nothing was happening. This lesson covers the four rules every income portfolio needs: reinvesting, spending, cuts and topping up.
While you are still building the portfolio and not yet drawing from it, dividends arrive as cash, and that cash needs somewhere to go. The simplest rule is to put it into whichever holding is furthest below its target weight.
With made-up figures, say your plan has target weights for five holdings, and this quarter the dividends add up to S$600. One REIT has drifted down to 15% of the portfolio against a 20% target, while a bank stock has grown to 28% against 25%. The S$600 goes to the REIT, not to the bank stock that paid the most.
This keeps the portfolio near its plan without selling anything, and it means you buy more of what has fallen in weight rather than what has risen. It is the same idea as rebalancing with new contributions, which the course Build and run an ETF portfolio covers for funds.
If a holding is below target because it failed a yield trap check, it should not get the money until you have rerun the check. The cut rule below covers that.
Once you start drawing income, the rule changes. Spend only the recurring income, and leave one-off payouts in the portfolio.
Lesson 3.3, One-offs, specials and payouts that will not repeat, explained why. A special dividend or a capital distribution is real money, but spending it as if it were income means planning around money that will not come again. Next year you either spend less or start selling holdings to make up the gap. Reinvesting the one-offs keeps your regular income at the level the plan expects.
In practice, when a payout arrives, check its label on SGXNet. Interim, final and the operating part of a REIT distribution are spendable. Specials and capital distributions go back into the holding that is furthest below target.
A cut is not an automatic sell. As lesson 2.3, Dividend growth and what it says about the business, explained, some cuts are a sign of decline and others are a sensible decision by a board protecting the business. What happens next matters more than the cut.
So the rule is to rerun the yield trap check from lesson 3.4, Run the yield trap check on a high yielder, before doing anything. Check the price trend, recurring yield, payout cover, debt and management's statements again, with the new numbers. For a REIT, also update its line on your REIT scorecard from lesson 5.5. Then decide: pass, fail or more evidence needed, and act on that.
Give yourself a fixed window, such as two weeks after the announcement, to finish the check. That keeps you from reacting on the day and from putting it off for months.
The last rule protects you from the trap itself. Do not add to a holding just because its yield has risen after a price fall.
Lesson 3.1, How a high yield turns into a loss, showed why. A rising yield on a falling price is often the market expecting a cut. Topping up at that moment means putting more money in at the point of greatest risk, on the strength of a number that looks backward.
You can still add to a holding whose price has fallen. The rule says only that the reason cannot be the yield. Rerun the yield trap check first, and add only if it passes and the holding is below its target weight.
Each rule should fit in one sentence, be specific enough to follow on a bad day, and leave little room for interpretation. For example: "When any holding announces a dividend cut, I will rerun the yield trap check within two weeks and make no trade until it is done." Vague rules, such as "review my holdings when needed," give way under pressure.
Darren's four rules fit on an index card he keeps with his brokerage login. He has broken one of them since, and he wrote down why, which taught him more than following it would have.
In the activity you will write your own four rules, one sentence each, in words you would be willing to hold yourself to on the morning of a cut.
Write four rules for your income portfolio: reinvesting, spending, cuts and topping up, each in one sentence.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).