Piedmont Office Realty Trust (PDM -0.15%) recently announced that its dividend would be reduced to $0.125 per share per quarter -- $0.50 per year -- due to higher interest rates squeezing its margins. That's down from $0.21 per share per quarter previously, and it's a serious blow to anyone relying on its shares for income.
Higher interest rates, along with post-COVID preferences toward working from home, have made things a bit tough for offices and the companies that own them. Piedmont Office Realty Trust's dividend might have been a recent casualty of those two factors, and it likely won't be the only one affected.
As an individual investor, you can't control dividend cuts, but you can control what you do about them.
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Protect your portfolio from a single company's challenges
As an investor, one of the most important things you can do to protect yourself from dividend cuts is to not rely on dividends to cover your current expenses. As awesome as dividends can be, they are never guaranteed payments. When a company gets into trouble -- like Piedmont Office Realty Trust did -- it can easily choose to cut its dividend in an attempt to protect its longer-term health.
It's helpful to view your dividend payments in two ways: as money to reinvest and as a signal of what a company's leadership thinks about its prospects. This way, you can get value from dividends without depending on them.
In addition, stories like Piedmont Realty Trust's showcase the importance of having a diversified portfolio. If you spread your investments out across multiple companies in a variety of industries, you reduce the impact of any one company's failure on your overall portfolio. No, diversification won't keep you from investing in a company that reduces its dividend, but it will keep the loss of that dividend from devastating your overall finances.
Keep an eye on your dividend payers
In addition to those foundational dividend investing principles, it's critically important to keep your eye on the companies in your portfolio. One of the best parts of a dividend is the fact that paying one sustainably requires the company to earn enough cash to cover the bill. That adds a layer of discipline and forces a certain level of public reckoning to help you see what's really happening.
For instance, Piedmont Office Realty Trust earned $0.69 per diluted share over its past four reported quarters while paying out $0.84 per share in dividends. While as a real estate investment trust, Piedmont Office Realty Trust must pay out at least 90% of its earnings as dividends, it doesn't have to pay more than it earns. Anytime a company does that, it's a good idea to keep a sharp eye out for signs of distress. Its dividend could very well be at risk, particularly if challenges persist.
As Piedmont Office Realty Trust showed, one of the key risks of a high dividend payout is that it makes it harder for a company to retain enough cash to pay off its debt as that debt matures. If interest rates rise -- as they have recently -- it means the new debt a business takes on to roll over the old debt carries a higher cost. That leaves less cash flow available for future dividends, putting those payments at risk.
Because a publicly traded company's dividend payout ratio and debt-service costs are visible in its financial reporting, it's possible to see signs of these risks before they show up as actual dividend cuts. You won't catch every problem this way, but by keeping an eye on key metrics like those for the companies you own, you can often avoid the worst yield traps.
Get started now
Whether you've already been hit with a dividend cut or you're simply worried that one of your holdings might soon trim its payment, the best thing you can do is take a closer look at what you own. By digging into the details and making changes if necessary, you give yourself your best shot at either avoiding the next dividend cut or at least reducing its impact on your portfolio. So get started now, and give yourself the most time possible to prepare for any dividend cuts that might be headed your way.