Here's What to Do When a Stock Stops Paying Dividends, According to Suze Orman

Stick to your long-term withdrawal plan.

Dividend stocks make up an essential part of many retirement portfolios. They offer a steady revenue stream that folks can reinvest through their stock brokerage. Or, retirees can cash out dividends to pay living expenses. 

But the stock market is unpredictable. Sometimes, these income sources dry up. Many companies, including Disney, froze dividends during the pandemic. Right now, macro events like supply chain issues and Fed rate hikes have the stock market in a tizzy.

That leaves retirees in a pickle. Do they keep their frozen stock in the hopes the company thaws payments later on? Or do they sell the stock and put their money to use elsewhere? 

In a recent Woman & Money podcast episode, financial guru Suze Orman offered retirees advice on what to do in this situation.

Suze Orman's advice 

Orman says, "If a stock has stopped offering dividends, in most cases…something has gone wrong."

But retirees shouldn't necessarily go ahead and yank their money out of the market. Orman recommends retirees first consider the following:

• Did you buy the stock for the dividend? 
• Do you have the stock in a retirement account?

Orman believes if you bought the stock for the dividend, the path forward is simple: Sell the stock. She believes it's a red flag when a company stops paying its dividend. She also believes the same holds true for a company that lowers its dividend. The company may have fallen on hard times. 

However, retirees should play it smart. That means taking into account any taxes they may be required to pay upon selling a stock. For example, 401k(s) and Roth IRAs don't make retirees pay capital gains tax for selling stock, but non-retirement accounts do. 

Ultimately, Orman doesn't feel comfortable owning non-dividend stocks in retirement. After all, even dividend stocks that perform poorly offer investors steady income.

Diversify investments

Retirees don't want to worry about income drying up. Diversification keeps portfolios stable. You can invest in a diversified dividend ETF to keep revenue flowing even when the stock market is down.

For example, say you own an ETF with 20 companies, and one company falls on hard times so it stops offering a dividend. No big deal -- you still have money coming in from the other 19 companies. The best ETF brokers charge you $0 for commissions for funds like this.

The market has been volatile, especially recently. Retirees should assess their risk tolerance when considering whether to keep a stock that has stopped paying dividends. One way to do this is by creating a budget that tallies up total income and expenses so you know exactly how much you're relying on dividends to fund your retirement.

What else should retirees consider?

If the stock market is down, think twice about withdrawing money from your brokerage account. The market declines frequently, but it has always eventually rebounded to new highs. Rather than withdraw money as cash, consider reallocating it to other dividend stocks in your portfolio. 

When in doubt, review your retirement withdrawal strategy to ensure you stick to your long-term retirement plan. The best thing to do is to make measured decisions and follow your long-term financial roadmap, adjusting as necessary.

A retirement withdrawal strategy ensures you don't run out of money too early into retirement. And knowing what to do with your dividends ahead of time helps you make the best decisions.