Search for income gets tough as dividends start disappearing

Income investors counting on dividend payments to tide them through the crisis will be disappointed.

The US Congress has banned firms that receive federal aid from buying back shares © iStockphoto
(Image credit: United States Capitol building © Getty Images/iStockphoto)

Are dividends the new bankers’ bonuses? During the financial crisis lavish salaries in high finance became a “lightning rod for political anger”, says Attracta Mooney in the Financial Times. In 2020, as US and European politicians urge companies to scrap payouts in return for bailouts, it seems that dividends and buybacks have taken on that mantle. Major British banks ditched their dividends last week under pressure from the Bank of England.

Global stockmarkets recently finished their worst quarter since 1987 but seem to have found their feet in recent days. Indices rallied at the start of this week, with Germany’s Dax rising nearly 6% and the S&P 500 7% on Monday to register its best day in a fortnight and its third-best in over ten years, notes John Authers on Bloomberg. Signs that the outbreaks could be set to peak in some countries have provided all of us with a rare dose of hope.

Can’t pay, won’t pay

Income investors counting on a stream of reliable payments to tide them through the crisis have been disappointed. Link Group’s UK dividend monitor shows that 45% of UK companies have already axed shareholder payouts. About £25.4bn in payments are sure to go, with another £23.9bn “at risk” this year. That means that about half of UK dividend payments could be axed for 2020 as a whole, compared to a 14% fall between 2008-2009.

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The search for income is “getting harder by the day”, says Michael Mackenzie in the Financial Times. Citigroup analysts think that earnings per share and dividends could halve in Europe this year, with dividends sliding 30% in America. What’s more, it took three years for US dividends to return to normal after the financial crisis. This time, futures show that traders don’t think US payouts will be fully restored for an astonishing nine years.

Buybacks banned

In America, debate has also turned to share buybacks, whereby a company purchases its own shares in order to boost its share price and earnings per share. Congress recently banned firms that receive emergency federal aid from conducting buybacks until the loans are repaid, leaving some observers asking if a crucial pillar of the US stockmarket’s long run of world-beating returns is dead. Just how crucial? Research firm Reynolds Strategy estimates that buybacks have added $4trn to the US stockmarket since 2009, reports Paul Vigna in The Wall Street Journal. Indeed, net zero inflows from investors, pension funds and the like since the financial crisis mean that buybacks have been the “only net source of money entering the stockmarket” since 2009. Without buybacks, future US stockmarket returns could become decidedly mediocre.

Income seekers should not lose hope, says Richard Evans in The Daily Telegraph’s Questor column. Unlike open-ended funds, investment trusts are allowed to “hold back some of their income” to ensure steady payouts when times are hard. During the financial crisis only one UK income trust cut its dividend. Let’s hope they can repeat that feat this time around.