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. Tax treatment on ISAs depends on individual circumstances and all tax rules may change in the future.

It may seem odd, in what has undoubtedly been another fretful week for everyone, to focus for a minute on a positive. There has been one though. Data out this week showed a very sharp bounce in activity in Chinese factories last month1. That follows evidence from a number of sources saying large numbers of retail stores and restaurants in China have now reopened.
 
It may be too early to say, but it could be that these are the first signs the coronavirus crisis is in retreat there. If that is true, then it is plausible the economic downturn owing to the virus – in China at least – may have been substantial but it could prove quite short.

Back in the west, the consensus outlook couldn’t be more different. At home, government officials were lining up this week seemingly to prepare Britons for an extended period of isolation measures that could last until autumn. If that happens, the economic downturn in the UK, owing to the shutdown of entire sectors, will be far from short.

A significant number of UK companies seem to be of the same mind. Some have chosen to throw in the towel on upcoming dividend payments because they don’t believe their businesses will be able to afford them as revenues disappear. Others appear to have decided it would be unwise to accept government relief while they reward shareholders.

This issue is important to many investors, especially those that rely on dividends from shares to either supplement their annual incomes or those who routinely reinvest dividends to grow their investment capital. Dividend cuts will reduce the investment incomes of pension funds and charities too.

UK companies that have announced dividend cuts or suspensions so far have predominantly been ones seeing an immediate impact from consumers ceasing to go out, shop or move home. Britain’s five main banks joined this list on Wednesday at the request of the Bank of England's Prudential Regulation Authority, with both dividends and share buybacks now suspended for the remainder of 20202.

Across sectors, the problem is multidimensional. BP and Shell both recovered ground this week, in spite of growing fears a steep fall in the oil price will usher in the hitherto unthinkable for them – dividend cuts or suspensions3. Expectations they could benefit at the expense of their smaller, weaker rivals in tough trading conditions may account for the discrepancy.   

Some companies that have already cut their dividends – for example, Go-Ahead, Kingfisher and Persimmon – have seen their shares stabilise or perform reasonably well in the days since4. Perhaps dividend cuts have started to cease being the business barometer we usually think of them as.

This may demonstrate just what an unusual market environment we are seeing right now. Investors appear to have been quick to accept that dividend cuts aren’t necessarily bad, so long as they help to secure their companies’ futures.

This assumption makes sense for fundamentally sound businesses looking to offset a temporary gap in sales, especially if those same businesses can emerge from the current crisis intact or, perhaps, even stronger.

There are dangers though. Companies that entered this year paying out a very high proportion of their earnings in dividends may decide this is a good time to permanently reduce payouts. That suggests the high historic yields on some UK shares have become a more unreliable indicator of future income than is usually the case.

Conversely, companies that reinvest most of their earnings back into their businesses and pay low dividends may be less likely to announce a dividend cut. In some cases, the payoff for investors may be accepting a smaller dividend yield in exchange for more certainty.

While the current situation is very likely to right itself in time, clearly, the near term is going to be difficult for equity income investors. Fewer dividend payers mean investors may need to rely on a decreasing pool of companies to maintain their incomes, with obvious disadvantages in terms of risk.

Without a decent income available from either government bonds or cash, corporate or high-yield bonds may offer a reasonable alternative but, once again, these have their own associated risks.

Equity income funds do at least offer a diversified income stream that most investors cannot achieve themselves through holding individual shares.

The Fidelity Global Dividend Fund benefits from being diversified across countries as well as about 50 companies. It’s run by the highly experienced manager and former accountant Dan Roberts.

Fidelity’s Equity Income team has decided to take a pragmatic view through the crisis, based on expectations of long-term total returns – income plus capital growth – as opposed to chasing income growth in 20205.

Colin Morton, the manager of another fund on Fidelity’s Select 50 list – the Franklin UK Equity Income Fund – is also taking a pragmatic view, drawing a distinction between companies seeing a reduced ability to repay debts and good quality companies with dominant market positions and resilient fundamentals6.

Given the current circumstances, it might be all too easy to forget that the end of the current tax year is nearly upon us. If you are uncertain about your immediate investing plans, remember you can open a Stocks and Shares ISA for this tax year (2019/20) and hold it in cash for the time being. However, miss Sunday’s 5 April deadline, and this year’s ISA allowance is gone forever – it can’t be carried forward to future years which, we all hope, turn out to be a good deal brighter. 

More on ISAs

Source:

1 National Bureau of Statistics, 31.03.20
2 FT, 01.04.20
3,4 Bloomberg, 02.04.20
5 Fidelity International, 26.03.20
6 Franklin Templeton, 25.03.20

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. Investments in emerging markets can be more volatile than other more developed markets. 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.

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