Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The biggest dividend payer in the FTSE 100 in 2019 has cut its payout for the first time since the second world war, sending its shares diving along with income-seekers’ hopes.
For decades, the oil giant Royal Dutch Shell has been a consistent source of dividend income, both for investors and the large pension funds that rely on it. Yesterday’s shock news of a cut, from 47 cents to 16 cents a share, unsurprisingly sent shockwaves through the market.
Perhaps equally shocking though was the corporate blow at the heart of the decision to cut the payout. Shell revealed that as a direct result of the coronavirus pandemic it has seen quarterly earnings halve.
With factories and offices closed around the world, people travelling less and largely confined to their homes, demand for oil has slumped to an all-time low. As a result of the collapse in demand, leading to a surplus of supply, prices have plummeted. Last week the price of Brent crude hit an 18-year low of $24 a barrel.
Many fund managers, like Fidelity’s Alex Wright, had already noted that dividend cuts were a “likely scenario for the oil majors”, and he, for one, had already taken steps to reduce his fund’s exposure to the sector.
Yet, just earlier this week BP resolutely maintained its dividend payout, despite posting a 66% drop in first quarter profits. It did though say it would review the dividend situation going forwards, essentially flagging that a cut could be on the cards in the second quarter.
And that’s a distinct possibility, with the International Energy Agency having already forecast a 30% fall in demand for oil during April and May, suggesting the worst may be yet to come.
This will have been a tough decision for Shell and not one that it has taken lightly. Its dividend payouts have been able to be relied on throughout numerous oil price bear markets. They endured during recession and currency crises and even throughout Shell’s 2015 bid for BG Group, made more notable still for the fact that this was during a period when Brent crude had then already halved.
But now, it says the priority has to be to preserve the financial resilience of the company. For the first time since the war, perhaps, critics may sneer that Shell is not putting its shareholders first. Although to give it its due, we are at a new period in time when frankly no one knows what could happen next.
And Shell is certainly not alone in cutting its dividend; many are ditching one altogether. In one study, looking at the period between 19 March and 20 April 2020, 92% of UK companies that were expected to announce dividends, revealed that they were cancelling or suspending payments. In total, of the 176 dividend announcements during this period, some 162 companies cancelled or suspended payouts and just 14 announced payments, some of which were reduced.
Among them was supermarket giant Tesco, yet competitor Sainsbury’s has just deferred its decision on whether to pay its dividend until later in the year.
Many investors will be hard hit by companies cancelling, suspending or reducing dividends they have come to rely on. And you can see why. In an era of lower-for-longer interest rates the hunt has increasingly been for income from equities. And the companies did not disappoint.
In the second quarter of 2019 dividend payouts globally came to a record total of $513.8 billion.
However, also worth noting today is that, according to the Janus Henderson Global Dividend Index Report, only 8% of all global dividends paid in 2018 were from holdings in UK-traded shares. While the pandemic is, obviously, a global issue, not all countries, economies or companies are at the same stage. This means there could be plenty of other opportunities around the world to source dividends.
While there are exchange rates to factor in when it comes to receiving dividends from companies who payout in other currencies, investing globally gives you access to the dividend potential of those companies not listed in London, from tech stocks in the US to leading pharmaceuticals in Europe.
Our Select 50 range of recommended funds offers a range of equity income funds. As well as those with a focus on the UK, like the Franklin UK Equity Income Fund and JOHCM UK Equity Income Fund, there is the JPM US Equity Income Fund with a focus on the US.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
When will Premier Inn-owner Whitbread get a break?
It’s unlikely to get one while pandemic lockdowns persist
Why doing nothing could be the best investment decision
Second-guessing an outcome could be a fool’s game