What worked in the past may now have to be put under the microscope. Unprecedented central bank interventions, record-low interest rates and the highest unemployment rates since the Great Depression are a challenging backdrop to stock selection for the medium to long term. It is reasonable to assume that share price volatility will remain as economies adjust to the post-COVID world.

While share prices have rallied, the same cannot be said of the dividends. The payout of total dividends from the ASX 200 expected to fall by over 20 per cent this year. But you know that already, as a stream of companies have either cancelled, deferred or reduced their 2020 dividends. It shouldn’t come as a huge shock as the Australian dividend payout ratio has been consistently higher (circa 70-80 per cent) than the rest of the world (sub 60 per cent), post GFC. As cash flows contract, companies have no choice but to reduce the dividend payout.

So, what do you do when the dividend favourites and the stalwarts of the last 20 years pose a real threat to your income? Firstly, don’t panic as it is not all doom and gloom; however, it may mean you need to restructure your share portfolio.

As every share portfolio is different and everyone has been invested for varying periods and have different aims and goals, it is not possible to say categorically what you should do. But here are some tips to help you through the process, so that you can construct the optimal portfolio of shares for you!

1. How much do you need? Establish how much income you need and whether part of that income can be swapped for a capital gain. Assess your sharemarket returns in a total sense (capital gain and income).
2. Assess the shareholdings you have. It took 10 years for the total Australian dividend payout to return to the pre-GFC levels. This does not necessarily mean this will be the case going forward. But you do need to assess whether you can accept lower dividends from your incumbent shares and use capital instead, until the economy picks up and the flow-on effects are felt in corporate profits and higher dividends.
3. Add some growth. Shares that are able to grow their dividend over time are the winners. As a rule of thumb, these shares have a lower dividend yield, think healthcare shares versus the banks, but they have delivered a higher total return (capital gain and dividend income). It is probably prudent to add some growth to your portfolio, which can usually be found in shares that yield around 2-3 per cent but have the capacity to grow dividends over the next 10 years.
4. Add some defensive shares. In a post-COVID world, some defensive shares are probably prudent. I know the big rotation is on into the bombed-out cyclicals. However, in the absence of a vaccine or improved cures, we are faced with a world that needs to accept the virus remains. Returning to a pre-COVID economy and the way we work, rest and play is developing, but business as usual remains a way off. The sharemarket will be very sensitive to any COVID outbreaks like we are witnessing in Beijing and parts of the USA (not to mention the continued growth in the emerging markets).
5. Lower for longer. The head of the Federal Reserve, J. Powell, made it very clear at the last Fed meeting, rates will stay low in the US until 2022. Whether this transpires remains to be seen. But it is prudent to assume we will continue to a “lower for longer” interest rate environment, meaning a 2-4 per cent dividend yield on non-financial shares is a reasonable expectation.
6. High dividend yields may be a trap. Any shares that offer a high dividend yield, excluding the iron ore producers who are raking in the cash from $100 plus iron ore prices, should be treated with caution. This means there is the potential for dividend disappointment and possible capital erosion. The four large banks are a case in point.

I like to mix up my share portfolio with some growth, some defensive shares and maybe even a quality bank, like Commonwealth. In these uncertain times, quality shares, with strong balance sheets, good corporate governance and identifiable earnings streams will offer older investors comfort. Of course, a vaccine would change everything overnight, so if you are feeling bullish about human ingenuity, then you could add some deep cyclicals like an airline or travel company.

Danielle Ecuyer is an author and investor.