Dividend Outlook Post Covid-19

What has happened?

The impact of Covid-19 has been felt across most sectors and companies.  With economic activity being severely impacted in the short term and uncertainty remaining on the exit strategies that will be adopted by different countries, we can anticipate dividend cuts across many sectors. Even well capitalised companies with strong balance sheets have come under pressure and the short-term impact will be pressure on dividends.

What are the implications for investment funds?

The impact will be felt most across funds that invest with an income philosophy, equity income funds. These funds are focused on generating income from stock dividends. Dividend paying funds have historically been favoured by more conservative investors who are attracted by the steady, long-term payments and defensive qualities offered by many traditional dividend paying blue chip companies. These are often characterised as stable, profitable and mature businesses.  Many of these funds will invest on a total return basis, meaning that they focus on generating a long-term return for investors which consists of both capital growth and income generation.  They are not just reliant on dividends.    

What are our thoughts?

We have a cautious mindset on the dividend outlook for the near term but are certainly more positive on the longer-term picture. We don’t think the current situation will result in an end to dividend culture but there will be a focus on responsible and sustainable dividend policies, which is ultimately a positive development for longer term investors. Against this backdrop, we have conviction in the managers of our preferred equity income strategies and the ability of these actively managed funds to use fundamental stock analysis to navigate this type of environment far better than a simple index tracking strategy.  That said, it is anticipated that income payments from our preferred funds will be lower for the next 6-12 months.

It is important to note that these dividend cuts will not necessarily indicate problems with companies but can also reflect prudent management with the aim of protecting the financial position of a company for the medium to long term.  This could mean that many companies will be able to resume or start raising dividend payments relatively quickly.  Certain businesses with more debt and higher ongoing costs will prove more vulnerable to declines in revenues and the flexibility of actively managed funds will prove very useful in this environment.

We are actively engaging with fund managers to understand how this evolving economic situation might impact their strategies in the short term and how they will position for dividend growth opportunities going forward.  Early indications from favoured managers are positive in acknowledging that, whilst there will be lower dividends this year, they remain focused on balance sheet strength and liquidity which will be key factors in the ability of companies to return to dividend growth.  Some have forecasted a strong bounce in dividend pay-outs in 2021.

For clients with an income objective, this may be a more challenging environment, but it is unlikely that your portfolio income is driven solely by equity dividends.  In a well-diversified portfolio, there will be more than one strategy for delivering the income or cashflow that is required, and this is something we will address in future articles.

In conclusion, we believe dividends will be under pressure for the next 12 months, but we think this will be a temporary situation and we will then begin to see dividend growth once again.  The yield from most, if not all, asset classes has been impacted by recent economic events.  Delivering income/cash flow will be possible and Five Wealth will cover this with clients directly.

The current situation also presents opportunities for long term investors.  We use equity income funds within a balanced and diversified investment portfolio, and we should remember that our funds are still investing in companies with attractive qualities which will drive the future returns from your investment strategy.

 

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance

If you have any questions or concerns, please do contact your adviser.

 

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May 1, 2020 Post by Roisin Duffy
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