Investors warned global dividends could fall by 35%

18 May 2020

Companies are looking to save cash during the coronavirus pandemic


Global dividends from investments could fall by more than a third this year as the coronavirus continues to hit economies worldwide.

Fund manager Janus Henderson says investors should expect a sharp fall in dividends paid out from companies they have shares in.

In the best-case scenario global dividends this year could fall by $213 billion to $1.21 trillion – a 15% drop. This includes cuts already announced, according to Janus Henderson.

In the worst-case scenario  which includes companies that the fund manager believes are vulnerable  global dividend payouts could fall by 35% this year, to $933 billion.

Janus Henderson says that the range reflects the rapidly developing crisis and the chance some companies will “simply reduce their payouts, rather than cancel them altogether” in order to conserve cash and bolster their balance sheets.

It calculates that global dividend payouts rose 3.6% in the first quarter to a record of $275.4 billion.

However, while dividends in the first quarter were almost entirely unaffected by the Covid-19 pandemic, the impact on the rest of the year is likely to be significant.

Investors in sectors including banks are likely to be worst hit by the coronavirus pandemic, while those in technology, healthcare, food and most basic consumer sectors should be safer, Janus Henderson says.

What are dividends?

Dividends are the amount of a company’s profits that are returned to shareholders in the form of a payment.

For some investors, stable, high dividend payments are an essential reason for owning the shares they do – they use them to pay bills or, if they get enough back, to live on completely. Other people chose to reinvest dividends straight back into shares in order to take advantage of compounding.

Companies offer dividends as a reason to own their shares. A big company cutting back on its payout is usually interpreted as a bad sign – the company is not making a big enough profit, is not confident about the future, or is running out of capital.

Where will be hit?

Europe and the UK could end up being the most severely affected this year as regulators have already forced banks and insurers to suspend dividend payments.

North America dividends will likely be less affected compared to Europe because of the high exposure to technology stocks.

The suspension of share buybacks by companies rather than dividend cuts are also likely to bear the brunt of efforts to preserve cash.

In Asia companies have already fixed their 2020 dividend payouts based on 2019 profits, so the impact is likely to be delayed until 2021.

Why have dividends been suspended?

Lots of businesses have suspended dividend payments in order to save money and to stay afloat. Many companies are also doing this because they are unsure when normality will return.

Last month, Royal Dutch Shell said it was slashing its shareholder dividend for the first time since the Second World War

There has also been pressure on firms which have accepted government support or slashed wages to cut dividends.

Ben Lofthouse, co-manager of Global Equity Income at Janus Henderson, says: “This downturn does look likely be very steep, but the support from governments and central banks has been on an unprecedented scale, which we can only hope will make any recovery swift.

“Dividend suspensions are inevitable due to the sudden, unprecedented halt in economic activity in many countries.”

How can investors mitigate dividend cuts?

Darius McDermott, managing director of FundCalibre, says there are a number of things investors can do to shore-up their reserves.

1. Diversify your portfolio by geography - Maybe invest in a global equity income fund or regional one as well as UK funds.

2. Consider an investment trust - These vehicles are able to hold back up to 15% of their income in good years for precisely times such as these. When dividends are scarcer, they can dip into this 'revenue reserve' to maintain dividend payments.

3. Consider other assets - Corporate bonds are looking more attractive now and have yields of about 3%. Also, bond 'coupons' (the income) are contractual, not discretionary like dividends, so there is less chance it will not be paid. So investors could look to add to these types of funds.

4. Opt for a multi-asset fund - These invest in all sorts of assets with the manager actively moving allocations to areas where prospects and income are more attractive.

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