A Written Income Plan: Twelve-Month Cash-Flow Projection and a Dividend-Cut Response Rule

What you will learn

• The six sections of a one-page income plan.
• How to build a twelve-month gross and net projection and compare it with spending.
• How to size a reserve and run a cut stress test.
• A dividend-cut response rule with thresholds and deadlines decided in advance.

Explanation

An income plan is narrower than the investment policy from the course "ETFs, Funds & Long-Term Investing": it states how much cash the portfolio must deliver, month by month, and what you will do when a payer fails. Its value lies in decisions made calmly now, not on the day a company cuts.

The six sections

1. Purpose and horizon: what the income pays for, for how many years, and whether capital may be spent.
2. Targets and limits: net income need, gross yield target, the caps from lesson 12, maximum share of income in foreign currency.
3. Twelve-month projection: expected gross and net receipts per month from each holding's last paid dividend and payment pattern, never from a forecast or an assumed increase.
4. Reserve rule: a separate cash buffer sized in months of spending, and how it is refilled.
5. Stress case: the projection if the largest income source is halved, and whether the reserve covers the gap.
6. Dividend-cut response rule: thresholds, deadlines and the redeployment rule, written as if-then sentences.

Writing the response rule

A cut is information. Historically, companies that cut once have often cut again or stayed flat for years; an observation, not a certainty, but it argues against "waiting for recovery" by default. A workable rule:

• If a holding suspends its dividend or cuts it by 25 percent or more: sell within ten trading days and redeploy the proceeds to the watchlist name with the highest safety score that fits within the caps. No averaging down.
• If a holding cuts by less than 25 percent: re-score it within five trading days with lesson 11's card. Score 7 or more: hold, mark "on review", no reinvestment for twelve months. Score below 7: sell under the same rule as above.
• Update the projection on the announcement day, not the payment date. If annual net falls below the need, use the reserve first and the spending-cut list second; a yield-chasing purchase is never the response.
• Any exception needs a dated, one-paragraph written reason kept with the plan.

Selling after a cut may realise a loss; it goes into the share-loss pot for future share gains. Holding a damaged payer because selling "locks in" the loss mixes a feeling with a decision; the capital is already lower.

Worked example

Hypothetical example: portfolio €300,000 in five groups; spending need €650 per month (€7,800 per year); allowance €1,000; tax 26.375 percent, no church tax; foreign withholding fully credited.

Monthly gross: Jan €450, Feb €600, Mar €720, Apr €1,200, May €3,000, Jun €720, Jul €450, Aug €600, Sep €720, Oct €1,200, Nov €600, Dec €720; total €10,980 (3.66 percent). Net: €1,000 + (€10,980 − €1,000) × 0.73625 = €1,000 + €7,347.78 = €8,347.78 against a need of €7,800: a surplus of €547.78, only 7 percent, a thin margin.

Reserve: three months of spending, €1,950, held separately and refilled from the May surplus. Income cap check: G4 supplies €2,400 of €10,980, 21.9 percent; the plan must record that G4 is five separate companies of at most €480 each, or rebalance.

Stress case: the largest single source, one German payer providing €960 per year (8.7 percent of income), suspends its dividend. New gross €10,020; net €1,000 + €9,020 × 0.73625 = €7,640.98: a shortfall of €159.02. The reserve covers it twelve times over; the rule says sell within ten days, redeploy, update the projection. The position was €24,000 (€960 / 0.04); a replacement at 4.0 percent restores the €960.

Common mistake

Practice activity

On paper: in the worked example, assume instead that the whole of G3 (€2,400 gross per year, €600 in February, May, August and November) cuts its dividend by 40 percent. Calculate (a) the new annual gross and net income, (b) the gap or surplus against €7,800, (c) the new receipts in February, and (d) what the response rule requires.

Key takeaways

• One page: purpose, targets and caps, twelve-month projection, reserve rule, stress case and cut rule.
• Project from the last dividend paid; a 7 percent surplus disappears with one suspension.
• Hold a separate reserve of two to three months of spending, refilled from the fat months.
• Decide the response to a cut in advance and document every exception.

Next step

You have completed this course. Continue with "Factor Investing: Value, Momentum, Quality and the Evidence", which examines whether dividend, value and quality tilts are rewarded over time and how to measure the factor exposure of the portfolio you have just planned.