The impact of Covid-19 on dividends

Dividends are both an important part of an investment return and a vital source of income, something which many investors have become more reliant on in recent years while interest rates have been so low.

But one of the many knock-on implications of the Covid-19 pandemic is that dividends are being cut, suspended, or cancelled. In the UK, companies passed up on more than £30 billion of dividend payments in the first half of this year.  At Investec, we estimate overall dividend income could fall as much as 50% in 2020.

There are differing reasons as to why businesses are cutting dividends, which can be broadly split into three categories:
 

1. They can’t afford to pay. This applies where a business’ revenue has been significantly impacted by the pandemic (for example, they have ceased trading during lockdown) and there simply isn’t anything available to pay out.
2. They can afford to pay but won’t. This includes businesses that technically do have cash on their balance sheets but, perhaps due to the lack of visibility on future earnings, they are putting dividends on hold. They might also be using this situation as a good excuse to reduce potentially excessive dividend commitments.  Or, they may be concerned about the political sensitivities of furloughing staff (for example) while paying dividends to shareholders at the same time.
3. They can afford to pay but aren’t allowed. This principally applies to the banking sector.  Unlike during the global financial crisis, banks are extremely well capitalised this time around. They can afford to continue paying their dividends but instead have bowed to regulatory pressure to preserve their capital and support the wider economy.

Certain sectors have been hit harder than others.  The banking and finance sector has been heavily impacted and so, unsurprisingly, has travel and leisure, and certain oil and gas stocks. Controversially, Royal Dutch Shell, which was the UK’s biggest individual dividend payer, has had to cut its dividend for the first time since WWII.

At the other end of the spectrum, the more defensive sectors during this pandemic (which are more likely to continue paying dividends as a result) include telecommunications, food and beverage, pharmaceuticals, and utilities.

Royal Dutch Shell, which was the UK’s biggest individual dividend payer, has had to cut its dividend for the first time since WWII.

For whatever the reason, dividends are going to be in short supply in 2020 and investors are likely to have to adjust their income expectations as a result.

We think it’s unlikely that companies will permanently abandon all future dividends but, as we are seeing, they may reduce or defer for now until things become less uncertain.

It could be several years before dividend payments return to their pre-pandemic 2019 levels, if indeed they ever do. In the meantime, investors will want to adopt different strategies depending on their circumstances.

For many, the best course of action will be to wait things out and give businesses time to recover.  For others, it may be appropriate to reduce the income that is drawn from the portfolio, or perhaps take more of a ‘total return’ approach to cash flow requirements, supplementing income with capital.  Where this isn’t possible, it may be necessary to rebalance portfolios towards higher yielding sectors or look to replace lost income from alternative sources.

As always, and as recent experience highlights once again, it is so important to keep diversified, take a long-term time approach to investing and maintain healthy emergency funds.

To contact or read more about Catriona Livingstone, visit her biography here.