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What dividend cuts mean for investors

30 April 2020

5 minute read

Public companies have reduced the dividends they pay at a record pace which has put annual payments worth more than £50 billion at risk. Here, we consider what the dividend cuts mean for you and what the future may hold.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest.

What you’ll learn:

  • What has happened to dividends and why.
  • What dividend cuts mean for me.
  • What the future holds.

As an investor, if you were hoping to at least partially offset the recent plunge in share prices with a regular, and hitherto reliable, dividend income payment, you may be in for some disappointment. Public companies have reduced the dividends they pay at a record pace which has put annual payments worth more than £50 billion at risk.

Here, we consider what the dividend cuts mean for you and what the future may hold.

What has happened and why?

Perhaps inevitably, due to the unprecedented scale of the current economic upheaval, companies across a range of sectors have cancelled their planned dividend payments and diverted the cash to shore up their balance sheets. This is to help companies navigate the ongoing uncertainty that the coronavirus has inflicted, and continues to inflict, on the economy. While many policymakers have welcomed this prudence – and some, such as financial regulators have all but insisted on it for banks and insurance companies – this is not without significant ramifications for you as an investor, and owner, in those businesses.

What does this mean for me?

By choosing to reinvest dividends rather than taking an income, you can benefit from compounding, as the additional shares acquired will help to boost overall returns over time. This means that if you are no longer receiving dividend payments, this can reduce the future growth potential of your investments.

If you are coming up for retirement and were planning to rely on your dividends to supplement your income (such as a state pension for example) and don’t have any other funds to draw on, you may now have to delay your retirement date or accept that you’ll have a lower income. If you are already retired, there are a few things that you can consider, such as reducing discretionary spending.

It’s usually recommended that you review your investments (including pensions) once a year. But, given the current stock market conditions, if you’re nearing retirement or have just retired, it can be worth revising your plans now.

What does the future hold?

Share prices have already fallen a long way in anticipation of the likely reduced dividend income on offer in the future. What this means for you is that, for the vast majority of companies, the new normal is a lower share price. However, indiscriminate repricing of shares – i.e. all companies being tarred with the same brush – mean it’s a great opportunity for good stock selectors, if 2002 and 2008 is any guide.

However, it is important to note that the nature of this downturn is somewhat different to what we have experienced in the past. On this occasion, large parts of the economy have been put into lockdown. However, these sectors (such as leisure, tourism, and hospitality for example) are likely to be restarted if, and more likely when, government containment efforts prove effective. In this scenario, we expect many companies will be able to resume paying dividends again relatively quickly.

But is this guaranteed? In short, no. For one, companies may suffer reduced profitability in the future which could have a negative impact on dividends, But also, when companies are permitted to restart paying dividends will depend to some extent on what approach regulators and politicians take to limiting future dividend payments. Certainly, companies that have accessed taxpayer support during this period of uncertainty may find that they need to overcome new hurdles before they can restart paying dividends.

Furthermore, a lot of the support being accessed by companies is in the form of debt but it is unclear how this debt will be treated in the future. Restarting dividend payments to shareholders while having a significant liability to debt-holders may prove controversial. If debt-holders are to be prioritised over shareholders then the latter may decide that they are prepared only to pay a lower price for owning shares in listed companies. However, it is worth pointing out here that there are plenty of companies that pay dividends and have debt – it’s certainly efficient to do so in many cases.

This current period of not paying dividends will also raise questions over whether paying dividends represents the best use of shareholder capital. One possible explanation for Britain’s relatively poor productivity in recent years has been the inclination to recycle profits back to shareholders in the form of dividends, rather than invest in research and development and the productivity of their workers.

Conclusion

The coronavirus is undoubtedly causing permanent damage to some parts of the economy and to some companies’ capacity to pay their dividend in the future. For this reason, it is now as important as ever to consider adopting a multi-asset approach to investing. A multi-asset fund combines different asset classes together. An allocation to both shares and bonds may help to deliver a regular stream of income. However, there are no guarantees – companies with no cash flow to pay dividends could find their ability to pay bond holders interest under pressure too, which could potentially lead to the bonds defaulting.

However, a multi-asset fund does offer diversified exposure across a number of companies in a range of different sectors so avoids over-reliance on any one particular company or sector. Also, by outsourcing the decision-making for selecting dividend paying companies and income yielding bonds to an expert fund manager, you are benefiting from the manager’s skill and expertise in navigating these turbulent and uncertain times.

Where you might invest

The Barclays Ready-made Investments are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Smart Investor offers a wide range of funds, and our Barclays Funds List may help you to narrow down the wide range available to invest in. These funds are selected by Barclays investment specialists and, based on our research, they’re the funds that have built solid reputations and established sound investment processes.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

All of these investments can fall in value as well rise; you may get back less than you invest.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.

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