The two most common questions I find myself answering are 1) Which companies might cut dividends? and 2) When will the economy return to normal?

This year through April 23, 111 U.S. companies have cut or suspended dividends. Over the past 15 years, only the years 2008 (122 dividend cuts) and 2009 (138 dividend cuts) were worse. But I will go out on a limb and say that this year will be worse than both of those Great Recession years.

I would be hard-pressed to declare any dividend safe in this environment. Consider that Royal Dutch Shell (NYSE: RDS.B) hadn’t cut its dividend in 75 years. At the beginning of this year, nobody would have dreamed that a dividend cut was in the cards for Shell. But four months later the company slashed its dividend after an unprecedented drop in global energy demand.

Given the magnitude of the disruption we are currently experiencing, many dividends that were safe three months ago are no longer safe. The longer this crisis extends, the more financial pressure there will be for companies to cut dividends to preserve cash.

Economic Headwinds

Some believe that the worst is behind us and the economy will rapidly recover once the country reopens. A recent CNN poll showed that this belief is influenced by your political affiliation. Of those identifying as Republicans, 71% believe the worst is behind us. But 74% of those identifying as Democrats believe the worst is yet to come. Even when it comes to the pandemic, the country is divided along partisan lines.

Why does this matter? Because I think it will dictate how different states will respond going forward. If blue states such as New York and California start to ease restrictions, and cases re-surge, they will be more likely to re-implement restrictions. These two states are ranked #1 and #3 with respect to their national gross domestic product (GDP) contribution, collectively accounting for about 23% of the nation’s GDP.

Red states such as Texas (second-highest GDP) and Georgia (#10) are more likely to attempt to stay open. But the overall effect of some states opening and closing, and others opening and trying to manage a potential resurgence of the virus, will weigh on the entire U.S. economy for the foreseeable future.

The Safest Havens

Given my expectations for the rest of the year, I think the riskiest dividends will continue to be in the energy sector. The midstream sector will be the safest area of the energy sector for the longest period of time, but even some of the weaker midstreams have already announced dividend cuts.

The utility sector has been historically recession resistant, but electric and natural gas utility CenterPoint Energy (NYSE: CNP) recently announced a 50% dividend cut. The company blamed its 53% ownership share in Enable Midstream Partners LP (NYSE: ENBL), which announced its own dividend cut.

There were special circumstances that helped force CenterPoint’s dividend cut, but CenterPoint isn’t the only utility that owns unconventional assets.

Further, the latest Short Term Energy Outlook (STEO) from the Energy Information Administration (EIA) projects that social distancing guidelines will continue affecting U.S. electricity consumption during the next few months.

EIA projects retail sales of electricity in the commercial sector will fall by 6.5% in 2020 because many businesses have closed and many people are working from home. That means the utility sector will come under some pressure in coming months.

The utility sector should nevertheless be relatively safe, especially utilities that are regulated.

But an even safer bet will be the consumer staples sector. Think of the companies whose products are in even more demand with so many people working from home.

According to the MSCI US IMI Consumer Staples 25/50 Index, the consumer staples sector makeup is as follows:

According to Fidelity, the consumer staples sector currently makes up 7.3% of the S&P 500, with an average sector yield of 3.20%. Major companies within the sector include Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO), and Walmart (NYSE: WMT).

While there may be no true safe harbors in the economic storm we are experiencing, income-oriented investors would probably be better off sticking with the relative safety of consumer staples and utilities.

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