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16 July 2026
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Income investors should never rule out a dividend cut. There are no guarantees with dividends and sometimes companies have no choice but to lower the amount paid to shareholders.
Dividend cuts are a live issue, and they are happening across the market. For example, we have already seen two FTSE 100 firms cut dividends this year, being drinks group Diageo and packaging specialist Mondi.
In the FTSE 250, there has been dividend disappointment from gas producer Energean, cider maker-to-pubs group C&C, recruitment agency PageGroup and retailer Pets at Home – all of whom have made cuts in 2026.
Among investment trusts, Capital Gearing Trust recently trimmed its dividend, while NextEnergy Solar Fund reset its dividend policy and guided for the payout to effectively halve this year.
With this list growing longer, it is time to wise up on the topic. Here’s why dividend cuts happen, how to spot companies most at risk of a cut, and ways to mitigate the impact on your portfolio.
Are dividend cuts a reason to sell?
Cuts happen for a wide range of reasons, and they are not always a red flag from an investment perspective. Nevertheless, they are disappointing whatever the reason as it means less money in your pocket as an income investor.
It begs the question: should you sell the investment upon a dividend cut? There is not a one-size-fits-all answer. As with all investments, you need to understand why the cut has happened, whether the investment case has changed, and whether a lower dividend still fits your needs. Just remember that dividend cuts can often be temporary, not permanent.
Why do companies cut dividends?
Dividend cuts can happen when a company has high borrowing levels and wants to repair its balance sheet by prioritising debt repayments. Occasionally, a company might opt to cut back on share buybacks for the same reason but keep dividends flowing – which is what happened with oil producer BP in February.
A company can cut or suspend dividends if headwinds imply more challenging trading conditions in the near-term, so they preserve cash as a precautionary measure. In April, airports-to-railway stations retailer WH Smith suspended its dividend and lowered earnings guidance as its shops saw a downturn amid weaker travel activity following the Middle East crisis.
More cyclical companies can pay out big dividends in the good times, yet they are also prone to dividend cuts in more challenging times. For example, mining companies tend to pay out a fixed percentage of profits so a substantial downturn in metal prices can lead to lower dividends.
Just look at diversified miner BHP – in the good times it is a highly profitable business and can pay out big cash rewards to investors. The reverse is true when the backdrop is less favourable, with a dividend cut last year amid weaker demand from major commodities consumer China and lower iron ore prices.
Diageo’s dividend setback
Dividend cuts can be common when a company is enacting a turnaround plan. That recently happened with Diageo whose recovery efforts are taking longer than expected.
The Guinness maker traded on a 4.6% prospective yield just before resetting its dividend in February to strengthen the balance sheet. The combination of the new dividend policy and subsequent share price weakness has now put the stock on a 3.2% yield. That is a double blow for someone owning the shares as a source of income.
Diageo’s dividend cut is a good example to study. The company’s 2025 annual report hinted that its dividend was on shaky ground after reporting a third year in a row of declining earnings per share.
The policy at the time was to make sure earnings were 1.8 to 2.2 times greater than the dividend paid out (known as dividend cover). The company fell short with 1.6 times cover in 2025 (the previous year it achieved 1.7-times, which was also below target), and so investors had no dividend growth that year, although they still pocketed something rather than nothing.
Six months later at the 2026 half-year results, Diageo reported another decline in earnings per share, down 2.5% year-on-year. Free cash flow – the amount of cash generated from operations minus capital expenditure – was also in reverse, falling by $164 million to $1.5 billion.
New chief executive Dave Lewis announced a new dividend strategy where the payout has been rebased – effectively halving what investors used to get. It was not good news for investors and income funds holding the stock, but understandable given the business still is not firing on all cylinders.
How to spot dividend-cut candidates
There are few steps to follow if you want to run a health check on companies in your portfolio from a dividend affordability and sustainability perspective.
The first is to divide a company’s earnings per share by its dividend per share, which gives you the dividend cover. The higher the number, the better. A figure above 2 is ideal, but investors might be happy with a figure above 1.5 for companies with predictable earnings like utilities.
Investors use the dividend cover number to check if a company can afford the dividend and whether there is scope for future dividend growth.
While the dividend cover measure is informative, it is not perfect. Hard cash pays for dividends, so you also need to look at the cash flow profile of the company.
The other step is to look at the dividend yield and compare it to what the company normally offers. If the yield is much higher than normal and the share price is falling, there could be danger ahead.
A falling share price is the market’s way of saying it is worried about something, which might be the strength of a company’s finances, trading conditions, or competitive threats.
To calculate a dividend yield, divide the expected dividend per share (DPS) by the latest share price (SP) and multiply by 100. If the SP part of the equation becomes a lower number and the DPS part remains the same, the yield will be higher.
Too good to be true?
Sometimes a higher-than-normal yield might represent a year when a company pays a special dividend on top of the normal one. But in cases where there is no special dividend, the yield might simply be too good to be true. In this situation, do not be surprised if it a precursor to the company paring back the dividend if it goes through a difficult patch.
Mondi is a good example – it was trading at 6.5% yield last October, whereas its yield over the past 10 years was more in the 3% to 5% range. Lo and behold, a dividend cut happened earlier this year amid weak trading for the packaging group and the yield is now back to 3%.
Unfortunately for investors, analysts are often slow to downgrade their dividend forecasts and might not change their estimates until the dividend cut has happened. In short, a much higher yield than previous years is typically the market’s way of saying the current dividend rate is unsustainable.
Advantages of funds and investment trusts
Income investors looking for ways to mitigate the impact of dividend cuts might want to consider investment trusts and certain types of funds.
Investment trusts can hold back 15% of their annual revenue in reserves to top up dividends in leaner years. This can help to smooth dividend payments and make up for unforeseen setbacks with portfolio income.
Actively managed income funds will consider a company’s ability to pay dividends and will seek to avoid stocks that fail short of the qualities needed for sustainable income.
Alternatively, there are various exchange-traded funds that invest in baskets of shares exhibiting certain characteristics such as financial strength and a history of dividend growth.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
