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I’ve come into some wealth recently and have calculated that I can easily live off of dividends. However, I am concerned about a big market downturn affecting dividend payouts. Do you find that dividends get cut substantially during bear markets (such as 2008-09) or are most blue-chip Canadian companies strong enough to withstand severe slumps without chopping dividends substantially?

You can minimize the risk of dividend cuts in your portfolio by investing in strong, stable businesses with a history of raising – not reducing – their dividends. However, you can’t eliminate the risk entirely.

During the financial crisis in 2009, for example, insurer Manulife Financial Corp. (MFC) surprised many investors by cutting its dividend in half. Since then, we’ve seen dividend reductions from companies including power producer TransAlta Corp. (TA), mutual fund provider AGF Management Ltd. (AGF.B), broadcaster Corus Entertainment Inc. (CJR.B) and a long list of oil and gas producers. Resource stocks are especially prone to dividend cuts because their fortunes rise and fall with commodity prices that are beyond their control.

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Even companies that were once seen as rocks of stability can slash their payouts; in the United States, the poster child is General Electric Co., which took a knife to its dividend in 2009 and then again in 2017 and 2018 as some of its businesses got into trouble.

The good news is that dividend cuts are still relatively rare, especially for well-established companies that have a strong competitive position. Among Canada’s major banks, for example, the last of the Big Six to cut its dividend was National Bank of Canada and that was back in 1992. Most of the other big banks have paid stable or growing dividends for well over a century, although during the financial crisis Bank of Montreal’s yield soared into the double digits, raising fears – which turned out to be unfounded – that it would cut its payout.

Even as banks put dividend increases on hold for several years after the crisis to rebuild their balance sheets, many other Canadian companies – Enbridge Inc. (ENB), TC Energy Corp. (TRP) and Fortis Inc. (FTS), to name just a few – continued to hike their payments annually. In the U.S., dividend growth stalwarts such as Procter & Gamble Co. (PG), Johnson & Johnson (JNJ) and Coca-Cola Co. (KO), among dozens of others, also continued to hike their dividends.

The lesson here is that if you want to generate a reliable stream of dividend income, you should focus on quality and diversify across companies and sectors to control your risk. If you lack the knowledge or time to manage a portfolio of individual dividend stocks, consider investing in dividend exchange-traded funds or broadly diversified index ETFs. The more diversified you are, the less impact a dividend cut will have on your cash flow. Also, be wary of stocks with very high yields, which can be a sign of a looming dividend cut, as happened with Corus, AGF and others. (For examples of stocks with yields, I consider sustainable, see my model Yield Hog Dividend Growth Portfolio at tgam.ca/dividendportfolio.)

Finally, devoting a portion of your portfolio to cash, bonds or guaranteed investment certificates will also help to control your risk. Some investors are okay with having 100-per-cent exposure to equities, but for most of us, putting a chunk of our capital in fixed-income investments will help to smooth the ride if markets hit a pothole.

I am trying to manage the equities mix in my portfolio based on sector. My holdings include Brookfield Asset Management Inc. (BAM.A) and Brookfield Renewable Partners LP (BEP.UN). I assume the latter is a utility but what sector does Brookfield Asset Management fall under?

As an asset manager, BAM is included in the financials sector under the GICS (Global Industry Classification Standard) system. Brookfield Renewable and fellow BAM subsidiary Brookfield Infrastructure Partners LP (BIP.UN) are both classified as utilities. Brookfield Property Partners LP (BPY.UN) falls under real estate and Brookfield Business Partners LLP (BBU.UN) is classified as an industrial. Tip: To find the GICS classification of any stock in the S&P/TSX Composite Index, look up the holdings of the iShares Core S&P/TSX Capped Composite Index ETF (XIC). The list includes the GICS sector for each constituent.

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We receive dividend income primarily from Canadian preferred shares, which benefit from the dividend tax credit (DTC). We are thinking of gravitating toward ETFs and two we are considering are ZDH and ZPW. Do these ETF qualify for the DTC?

No. The BMO International Dividend Hedged to CAD ETF (ZDH) invests in dividend stocks domiciled outside North America, while the BMO US Put Write ETF (ZPW) generates income by writing put options on a portfolio of U.S. large-cap stocks. Because these ETFs do not invest in Canadian dividend-paying stocks, they do not qualify for the DTC.

A quick way to determine whether a particular ETF benefits from the DTC is to look up the annual tax treatment of its distributions. With BMO ETFs, for example, this information is provided under the “Tax and Distributions” tab on the web page for each ETF. For both ZDH and ZPW, the amount listed under “eligible dividends” for 2018 is zero. (Note: You must choose a year in the drop-down box and then scroll down to see the annual summary and eligible dividend amount, if any.)

E-mail your questions to jheinzl@globeandmail.com.

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