Why your retirement income may take a hit — and what to do about it

Lower dividend payments doesn't need to mean disaster.

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Retirement income from dividends can play an essential part in a retiree's financial picture.

But dividend payments are never guaranteed, and payout cuts now appear likely from one major ASX blue-chip player that tops the list of shares held by self-managed superannuation funds (SMSFs).

A dividend reduction from ASX mining giant BHP Group Ltd (ASX: BHP) due to lower commodity prices, elevated debt, higher operating costs, and Samarco mine disaster expenses may affect almost 70% of Australians, according to reporting by the Australian Financial Review.

I have some alternate suggestions that could bolster cash flow. But first…

How much could the BHP dividend be cut?

The current estimate on Commsec suggests the annual BHP payout could fall 12% in FY24 to $2.27 per share, resulting in a grossed-up dividend yield of 7.1%.

However, the FY24 first-half result saw a 20% cut in dividend payouts, which is a sizeable reduction for anyone's income. If the full-year payout is cut by 20%, investors will face an even larger cash flow hit.

According to accounting software business Class, BHP is the most held stock by self-managed superannuation funds (SMSFs), having a place in 48% of SMSFs. It makes up 5% of investment balances. And don't forget that the miner is a major holding in exchange-traded fund (ETF) and listed investment company (LIC) portfolios, too.

Plato portfolio manager Peter Gardner said (courtesy of AFR):

[BHP's] dividend is important for retirees, likely making up more than 10 per cent of the income they get from Australian equities.

I think it's important to recognise that a significant amount of BHP's profit is generated by the iron ore division. The iron ore price can be very volatile and is significantly impacted by demand from China.

BHP is an excellent miner, but I don't think we can depend on it for a large, consistent dividend yield. That's why I wouldn't make it a top choice for Australian retirement income.

The BHP dividend is forecast to decrease in FY25 and FY26 – the 2026 financial year payout could be 6.7%.

Where to invest instead?

If I were targeting passive income, I'd want to look at stocks that can deliver pleasing dividend yields and organic growth rather than relying on commodity prices.

For example, market-leading telco Telstra Group Ltd (ASX: TLS) offers a vital service to households and businesses. It gains new subscribers every year, boosting its revenue and scale. According to Commsec, it's predicted to pay a grossed-up dividend yield of 6.8% in FY24 and 7.6% in FY26.

Shoe business Accent Group Ltd (ASX: AX1) sells through a wide range of brands in Australia, including Skechers, Vans, and The Athlete's Foot.

As it continues to grow its store count, it might pay a grossed-up dividend yield of 8.5% in FY24 and 10.6% in FY26. It's a higher-risk idea, but it could really boost someone's retirement income.

Charter Hall Long WALE REIT (ASX: CLW) is a real estate investment trust (REIT) that owns a variety of properties, with all of them having long leases. Ongoing rental growth is helping offset the higher cost of debt. It's projected to pay a distribution yield of 7.3% in FY24 and 7.6% in FY25.

Motley Fool contributor Tristan Harrison has positions in Accent Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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