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Many investors dread dividend cuts as a sign of a company’s flagging financials. It follows that recent reports indicating that 2015’s count of dividend cuts exceeded that of 2008’s could spook shareholders.

On the forefront of the dividend cutting trend is, not surprisingly, the oil industry. Crushed by a steep decline in prices, oil producers have struggled, and continue to struggle, with dwindling earnings. Reducing dividend payouts to shareholders is one way of trying to neutralize the impact to earnings. Chesapeake Oil, for instance, cut dividends by -66.7% to $0.0875 per share as of September 2015.Transocean’s dividends plunged by -80% by mid-2015.

Some companies, like ConocoPhillips, that have been increasing dividends over several years are now induced to pull the plug. ConocoPhillips’ dividend per share is expected to decline by from 74 cents to 25 cents. Other commodities firms are feeling the pinch too. Peabody Energy, the world’s largest private coal company, cut its dividends to $0.025 per share in 2015 from the $0.085 level it had maintained for the preceding four years. Rio Tinto is another firm that had long adhered to a progressive dividend strategy in the past, but now seems to have succumbed to the increasing pressures of commodity rout. There are also speculations about its rival BHP cutting dividends as the possibility of a credit rating downgrade intensifies.

Seeing resource-sensitive companies scramble to cut dividends, along with the knowledge that dividend cuts surpassed the levels of the last recession, could inject pessimism in markets. However, what should also be considered here are the potential optimizing strategies firms are using to combat global headwinds, dividend decreases being one of them. The other constructive view is that there is more positive than negative; while the count of dividend cuts went up by +33.6%, the number of dividend increases rose by +64.8% from 2008.

Dividend Cuts and Hikes Rise from Recession Levels

Data Source: S&P Dow Jones Indices Dividend Stats

Bottom Line for Investors

Although energy and commodities are facing challenging times, they are also actively strategizing to mitigate risks. Through dividend cuts, they seek to improve their ability to pay off debts and to stock up on enough cash to support solvency during highly uncertain times. The most stable players may even see the opportunity to invest in growth opportunities, once global turmoil subsides and demand starts to pick up, allowing their liquidity optimization strategies of today bolster their value in the future.

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  Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Ronald Read spent the better part of his life working as a mechanic and a part-time janitor at J.C. Penney—a far cry from the highly skilled jobs that normally produce millionaires over time.

Yet, following his passing last summer, Mr. Read’s estate made its first distributions—$4.8 million and $1.2 million to the Brattleboro Memorial Hospital and the Brooks Library, respectively.

Wait a second…a mechanic turned janitor donated over $5 million to charitable causes, with more money yet to be dispersed? Believe it or not, yes.

Mr. Read, an everyday service worker whose khaki denim jacket was barely held together by a safety pin (he wore it regularly), and who someone once bought breakfast because they thought he was homeless, had amassed an estate of over $8 million. But how?

Being an astute saver was a big part of his success. Mr. Read wasn’t a flashy guy—he often wore the same flannel shirt and didn’t care much for material possessions. He wouldn’t even park his car close to his attorney’s office, because it meant having to pay for parking!

Frugality made a world of difference, sure, but Mr. Read’s investment strategy was really the driving force behind his amassed estate—he was a huge fan of dividend-producing stocks.When Mr. Read’s attorney went to retrieve his estate documents from his safety deposit box, she found a “wealth” of stock certificates—worth over $8 million! When it was all said and done, Ronald Read had built a mini-empire with a safety deposit box and a dividend-stock portfolio.

Realizing the Growth Potential of a Dividend Stocks

We wouldn’t recommend your portfolio be solely concentrated in high dividend-paying stocks, like Mr. Read’s, as it also benefits to diversify into other categories to, theoretically, add some alpha and perhaps even reduce risk.

But Mr. Read’s strategy no doubt worked, and the fact that he maintained an unwavering commitment to the long-term benefits of owning equities was critical in his achieving that level of success.

How to Build an Effective Dividend Strategy

An effective dividend strategy can not only potentially generate equity-like returns over time, it can also help reduce downside volatility in the near-term and potentially the long-term as well (especially when the broader market is posting cyclical losses). Dividend stocks have historically held up better in bear markets than low-or-no dividend paying stocks, and one of the reasons is because a sizable portion of high dividend paying stocks’ return is in the form of cash (which is insulated from downturns).  

The Bottom Line for The Savvy Retiree

Mr. Read’s story is a nice anecdote for investors hoping to achieve long-term success, and perhaps the most attractive aspect of his story is its simplicity. Many times investors over-think strategies and that leads to market timing or emotionally-driven decisions that ultimately hurt long-term performance. If we can learn a lesson from Mr. Read (besides the benefits of being frugal!), it’s that if we focus astutely on the long-term benefits of equity investing, we can increase our probability of achieving the result we want.

In addition to exploring emotionally-driven investing, we also discuss 9 other pitfalls investors regularly all in to - to learn more about these challenges, so you can avoid them, click on the button below to download our guide on "10 Investing Pitfalls to Avoid."

We are about a month away from this bullmarket turning seven years old making it the 4th longest bull marketsince 1928. Fortunately, age alone doesn’t end bull markets. But, as a bull matures certain things tend to happen - volatility sets in, market breadth starts to narrow, defensive names may outperform economically sensitive ones and being selective becomes critical.

I’ve noted many times recently that I believe this bull market has some room to run - and I still think that’s the case. But, I also think investors would be wise to consider rebalancing portfolios to categories of stocks that tend to do well in aging bull markets. One of those categories is dividend-paying stocks.

Dividend-Paying Stocks May Temper Downside Volatility

A high dividend-yielding strategy can help reduce near-term downside volatility and provide downside protection when the broader market is posting cyclical losses. Dividend stocks have historically held up better in bear markets than low-or-no dividend paying stocks as a sizable portion of high dividend paying stocks’ return is in the form of cash (which is insulated from downturns).  

To be fair, it is right to concede that a high dividend equity portfolio may underperform during strong growth markets. But, in terms of this particular bull market cycle, those years may be behind us already. Moving forward, we could see a greater degree of choppiness and eventually (though I do not think this year) the bull market will become a bear. During that transition, whenever it occurs, a portfolio of high dividend paying stocks can potentially produce attractive total returns and lower levels of volatility compared to a portfolio of low-or-no dividend stocks.

How to Build an Effective Dividend Strategy

With the Dividend Strategy at Zacks Investment Management, we choose stocks from the Russell 1000 Value universe and use a proprietary model to screen names for potential entry. We analyze dividend yield, seek names with potential for price appreciation and look for attractive beta relative to the market.

The result is a portfolio of 50 to 100 stocks. We’ve been fortunate to have strong absolute and relative performance with the Dividend Strategy since inception. From April 2004 – December 2014, the Zacks Dividend Strategy has delivered net cumulative returns of +133.56%, compared to the +128.75% return of the Russell 1000 Value.

What I think stands out most in those years was the Zacks Dividend Strategy performance in 2008. This year was the year of the Great Recession and quite difficult for most equity investors. In that year, the S&P 500 lost -37% and the Russell 1000 Value lost -36.85%.  Comparatively, during this challenging time, Zacks Dividend Strategy fell -27.78% on the year. Our outperformance in that bear market year underscores the value of a well-executed dividend strategy in a down cycle.  Certainly, the hope is that investors will not have to experience gut-wrenching times like this, however the situation illustrates the benefit of a well-managed portfolio.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.