You may have seen the news. Early in May, Whirlpool—the company that makes washing machines, fridges, and most other appliances for a kitchen, including KitchenAid mixers—announced it was stopping its dividend. That dividend had been paid every quarter for 70 years. Unsurprisingly, the stock fell about 14% in a day, hitting a 14-year low. You read that right: as of this writing, the stock is at the same price it was 14 years ago, and there is now no income for investors who bought the stock expecting a dividend.

For investors who owned Whirlpool because they were counting on that dividend payment, this was a tough day. That income has stopped, and to make matters worse, the stock is down. The company’s management has said that paying down debt now comes first, so shareholders should not expect another dividend any time soon. We are currently seeing a similar story unfold with private debt funds, real estate funds, and other investments that do not have the cash flow to pay their promised distributions, and are halting or reducing payments or pausing redemptions.

As always, the headlines will blame extraneous forces: the war in Iran, weak home sales, and a nervous consumer. Some of that is fair, but there is a simpler thread running through this—Whirlpool was paying out more than it was earning and doing so for a long time. In a business highly sensitive to economic shifts, a downturn led to the dividend being cut for the first time in 70 years. Proof again that the cash flow that funds the dividend, not the decades it’s been paid, is the key to safety.

Let's be clear—no investment process is perfect, and we will never tell you that nothing bad can ever happen to a company we own. Surprises happen. Companies do disappoint. But there are checks and balances that can be put in place to find out "who is swimming naked" and to make better risk-reward decisions.

We carefully evaluate whether a company can actually afford its dividend. The companies in our Canadian and US Dividend Income strategies generally use less than half of their profits to pay their dividends. That cushion matters. If business slows for a year or two, which it inevitably will, they can keep paying you. Whirlpool did not have that cushion, and it was actually visible to those that cared to look well before the announcement.

We lean toward businesses that are steadier through economic cycles. Whirlpool sells big-ticket items, so, unsurprisingly, when people are worried about money, the last thing they buy is a new dishwasher—they fix their old one. The companies we tend to own—Canadian banks, grocery stores, pipelines, utilities, telecoms—offer things people use every day, in good times and bad. People still pay their phone bill in a recession. They still buy groceries. They still heat their homes. That tends to make their dividends more dependable, though “more dependable” should never be construed as “guaranteed”.

We look for dividends that grow, not merely those with impressive current yields. A high yield can be tempting, but if the company behind it is not growing its earnings, that yield is often a warning sign rather than an opportunity. The companies we invest in typically target annual dividend growth of 6 to 8%, supported by genuine profit growth rather than relying on financial engineering, such as funding dividends through new debt.

Could the Whirlpool story have been spotted ahead of time? As we noted earlier, the warning signs were evident to anyone examining the numbers. This underscores the importance of a disciplined process to ensure a business is a viable going concern—one that is genuinely profitable and protected by a durable competitive advantage, whether regulatory (as in banking) or structural (such as the irreplaceability of a railroad). Such an approach helps tilt the odds in your favour for long-term capital growth.

In doing this work up front, we look to own a basket of real businesses that can weather storms and survive through expected economic changes. The world is always uncertain. Yet, as you know from your own life, when you have a cushion and don't spend more than you make, you can withstand downturns better than someone highly leveraged with debt on an unaffordable house and cars financed through monthly payments. The same is true with companies, and unfortunately, Whirlpool carried significant debt.

We believe in our process wholeheartedly; accordingly, we own the strategies we talk to our clients about, and as always, we thank you for your trust.

Randy, Ian, Harrison and the team at R&R Investment Partners

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