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.
2020 has proven to be ruthless in separating market winners from losers. One such severance has been between the shareholders who kept their nerve to see markets recover their initial pandemic-induced losses, and income-seekers who have been left reeling from countless companies cutting or cancelling their dividend payments.
There was further bad news for the latter in the latest UK Dividend Monitor report from Link Asset Services. UK dividends fell 49.1% in Q3, dropping to £18 billion, the lowest Q3 total since 2010. Link expects UK dividends (excluding specials) to fall to £60.4 billion on a best-case basis and £59.9 billion on a worst-case basis, a decline of 38.7% and 39.2% respectively - an “historic decline”, according to the group.
But, for the first time in a while, there may also be cause for optimism.
1 - Signs of life for UK dividends
Though the figures above are alarming, they do represent some marked improvements on the (admittedly dismal) Q2 report. The decline this quarter was less severe than last’s, and while two thirds of companies cut or cancelled their pay-outs, it’s still an improvement on the three quarters that did so in Q2.
It’s also reassuring to see that a number of companies across a breadth of sectors have already reinstated the dividends they cut as a precautionary measure earlier this year, among them BAE Systems, IMI, Ferguson, Mondi, Admiral and Bellway. The former two have become the first companies to catch up on all the dividends missed year-to-date.
Link said: “UK plc is not out of the woods, but the trees are perhaps thinning a bit… The fourth quarter this year and the first quarter next are set for further sharp declines, but from April onwards, the anniversary of the lockdown, the comparisons will start to look more favourable and we expect to see a bounce-back begin.”
2 - Active management can help
It sounds obvious, but equity income fund managers try to pick companies that look most able to deliver income for the long-term, and ignore those that don’t. That’s easier said than done of course, but managers of actively managed funds assess not just headline income levels but also their robustness going forward.
Good dividend payers tend to be those companies that aren’t capital intensive, but rather have strong cash-generative business models. Many of the companies struggling now are those that were over-distributing capital when times were good.
That’s the approach of Fiona Harris, Investment Specialist of the JPM US Equity Income Fund, who looks for “consistency of earnings; good companies that over the long-term pay well… our companies are awash with cash flow.”
It’s a sentiment echoed by Dan Roberts, manager of the Fidelity Global Dividend Fund, who explains: “A constant focus on owning financially sound businesses should help us to avoid the worst outcomes elsewhere in the market.”
3 - There’s a whole world out there
UK investors tend to look to their home market for equity income by default. The UK has long been characterised by its generous dividend payers, with big names like Royal Dutch Shell historically rewarding investors through thick and thin (though even Shell has succumbed to 2020’s dividend bonfire).
But focussing exclusively on UK companies for income is a very narrow approach, as this year has shown. The UK’s preponderance of structurally challenged sectors like energy and banks has hampered its dividend pay-outs this year even more than its recovery on the stock market.
According to Link, of the £14.5 billion worth of cuts in the third quarter, banks accounted for almost two fifths, as they remain barred from paying dividends by the Bank of England. The oil sector contributed another fifth and mining one eighth, though gold miners bucked the trend by paying sharp increases.
Limiting yourself to the UK could inhibit your income sources this year and beyond. There are a whole host of global dividend payers - approximately 4,500 - of which UK companies account for around 250.
Another option is the Invesco Global Equity Income (UK) fund, which mostly looks for Dividend Compounders - that is, companies that have a strong track record of paying and growing dividends.
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Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. 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. 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.