What to know about surviving the dividend drought

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June 18 2020
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Investors who are reliant on dividends have been hardest hit during the COVID-19 pandemic, as the dividend expectations have fallen off a cliff due to an uncertain future.

A paper penned by Nikko’s portfolio manager and senior analyst, Malcolm Whitten, showed that despite the ASX 200 falling by 30 per cent investors in oil and banks, dividends expectations are down 66.8 per cent and 46.6 per cent, respectively.

With many older Australians and SMSFs having a larger proportion of assets in banking and mining shares, it has left many without a stream of income.

The most robust dividend segment has been industrial ex-banks, which is still seeing an 18.3 per cent decline.

“All dividend distributions are at the discretion of company boards. An ‘abundance of caution’ has been behind most decisions to deny, defer or diminish dividends by proportions greater than the effect justified by the earnings decline.

“While the uncertainty regarding the bank dividends is disconcerting, in the circumstances, the consensus expectations imply that investors are prepared for a six-month dividend suspension before the restart of the economy takes shape and boards regain confidence reinstate deferred dividends,” Mr Whitten said.

Looking forward, the paper has found that dividend yield of 4.6 per cent has now been revised to 3.5 per cent.

“This dividend per share drought is a direct consequence of the impact on earnings and business confidence. The dividend yield convergence is a result of extreme unconventional monetary policy, which has crushed yields in traditional competing yield financial assets,” Mr Whitten explained.

However, in good news for investors relying on dividend yields, Mr Whitten predicts that the dividend drought will break shortly after the COVID-19 pandemic ends.

“There are few companies that benefit relatively or suffer less from the current events. We note the valuation distortions that will be the source of funding for those companies we are prepared to back to make it to the other side.

“The COVID-19 episode will pass and the dividend drought will break as activity and confidence return. Malcolm and the team remain confident that the rolling five-year income objective of a grossed-up dividend yield greater than the S&P/ASX 200 yield with long-term capital growth will be met,” Mr Whitten concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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