For many investors, corporate earnings seasons are a time for harvesting company dividends.

Depending on your strategy, they can be taken as an income stream used to fund living expenses, reinvested back into the shares of the company paying the dividend, or redirected into another investment.

But, as the latest earnings season finishing at the end of February has just proved, dividend payouts to company shareholders can be highly unpredictable and sometimes unreliable.

In the last six months of 2020, the ongoing effects of the COVID-19 pandemic on many company profits was telling. And that directly translated into how much cash company boards were willing to distribute back to their investors.

While around one-third of Australia's biggest listed companies (35 per cent) declared they would be making higher interim payouts from the six months to 31 December, an almost equal number announced cuts to their dividends.

Others kept their dividends unchanged, while a sizeable percentage of big companies (about 20 per cent) didn't declare any dividend at all.

There were also some very big swings in the dividend per share payouts.

A number of companies that announced strong earnings results lifted their interim dividends by more than 30 per cent, including several by between 50 and 90 per cent.

However, there were also some really big falls, with several big companies announcing they were cutting their interim payouts by between 50 and 80 per cent.

In many cases that reflected their poor performance in the latest earnings period, but dividend payouts were also affected by some company boards choosing to keep more cash on their balance sheet as a buffer against lower revenues and rising operational costs.

In fact, at the end of December, Australia's largest 200 companies collectively were holding almost $170 billion in cash reserves.

Income challenges for investors

The variability of dividend payments from the latest earnings season period is certainly nothing new.

They just highlight that, far from being stable income streams, individual company payouts can be extremely changeable.

Even holding a portfolio of select top-tier companies doesn't guarantee receiving the same level of dividend income from one six-month reporting period to the next.

That's a genuine problem for many investors, especially those reliant on steady cash flows such as retirees.

Record low interest rates have already severely eroded income returns from other asset classes such as fixed interest and cash.

While the majority of Australia's biggest companies have declared dividend payouts from the second-half of 2020, it's only investors with exposures to those specific companies that will benefit.

Increasingly, investors are capturing a higher percentage of dividend flows from the share market through equity exchange traded funds and managed funds that invest across a large number of listed companies.

For example, an ETF covering the top 300 companies on the Australian market receives dividends from all of the companies paying them, which are passed through to the ETF's unitholders as regular distributions, usually quarterly.

The size of the distributions paid depends on how many units are held and on the aggregated amount of dividends paid over time by the companies the fund is invested in.

Taking a total return approach

The dilemma for income-focused investors is choosing an investment strategy that supports one's lifestyle without having an over-reliance on income streams such as dividends.

It's therefore important to look at all sources of investment return: both income and capital.

A total-return approach assesses individual or household goals and risk tolerance, and then focuses on asset allocation to ensure it can sustainably support one's spending needs.

Unlike an income-oriented strategy, which generally seeks to use income returns for cash flow and preserve capital, a total-return approach encourages using capital returns when necessary.

At times where the income yield of a portfolio falls below spending needs, as may be the case from the recent earnings season, the capital value of a portfolio can be spent to make up the shortfall.

As long as the total return drawn from a portfolio doesn't exceed the sustainable spending rate over the long term, this approach can smooth out spending during volatile market periods.

Alternatively, a portion of the income yield can be reinvested during periods where the income generated by the portfolio is higher than the sustainable spending rate.

While capital returns – represented by the share price movements – can be a volatile component of this strategy, taking a long-term view is paramount.

In the current low returns environment, in addition to the benefit of smoothing spending throughout retirement, a total-return strategy can allow investors to better diversify risk.

This can be done across countries, sectors and securities, rather than skewing a portfolio to a segment of the market with higher income yields, or worse, taking excessive risk by reaching for a desired yield.

Tony Kaye for Vanguard Australia