The great dividend massacre continues.
This morning, telecoms group BT has scrapped its payout, warning that it will be lower when it returns in the future.
It’s just the latest in a long line of cuts. It’s also unlikely to be the last.
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So how bad will it get, and what can income investors do now?
The UK faces a barrage of dividend cuts
BT isn’t a “dividend hero” or “aristocrat”. But it has managed to pay a dividend every year since the tech bubble burst. That includes 2008 (although the payout was cut).
But coronavirus crisis has forced its hand. The final dividend for the last financial year (which ended in March) is going, and it won’t pay anything in the current financial year.
When (and if) the dividend is resumed next financial year, it’s expected to come in at 7.7p a share, which is pretty much a 50% cut on the last payout.
The shares have fallen by 10%, which does show you that investors had still been holding out some hope that it wouldn’t be as bad as all that. Perhaps the entire market is still running on slightly rose-tinted spectacles.
Anyway. BT is of course not the first UK company to cut its dividend and it won’t be the last. But BT is one of the bigger payers so this really is more bad news for dividend investors.
The FTSE 100 has historically been a high-yield market. However, many of the sectors that gave it this reputation are now cancelling or reducing their payouts, while many of those that haven’t yet bitten the bullet look at serious risk of having to do so.
The banks have scrapped their dividends, under both political pressure and with an eye to burgeoning bad debts. Retailers such as Next and M&S have cut their payouts, as sales tumble. And Royal Dutch Shell, of course, was one of the most painful blows of all.
Colin Morton of Franklin Templeton tells Citywire’s Michelle McGagh that he expects dividends from the UK All-Share index to fall by 40%-50% this year. He reckons that BP will follow Shell (which seems logical – in effect, Shell has given its peers permission, even encouragement, to cut their dividends, although obviously it depends on what happens to oil prices in the next few months).
The UK is still likely to remain one of the higher-yielding international markets, but that’s not much consolation for anyone who has seen their dividend income hammered by this slump.
And while income isn’t everything – you should be paying attention to total return – a company’s ability to pay out profits to shareholders is a key indicator of corporate health, so it’s entirely understandable why plenty of investors regard it as important.
Take a look further afield
If you’re one of those investors, you could take a more global overview. One option is to consider Japan. The country has had its own struggles with coronavirus but certainly appears to have been hit less hard than we have in the UK.
Moreover, Japan doesn’t face the same political pressure to cut dividend payouts because historically, its companies haven't been big ones for returning cash to shareholders. However, that’s changing.
Recently the yield on Japan's Topix index headed above 2.5%. And in the past decade, Japan has had the highest dividend growth of any major market, as Jonathon Curtis notes on the Hargreaves Lansdown website.
Of course, there will still be dividend cuts in Japan. It doesn’t make a lot of difference whether you are based in London, New York or Tokyo if your products aren’t selling, so the transport and services sectors, to name just a couple of areas, may run into trouble.
But it's certainly worth investigating – we’ll be covering specific income ideas drawn from Japan and wider Asian markets within the next few weeks in MoneyWeek magazine. Meanwhile, in this week’s issue, David Stevenson runs through some of the more reliable-looking equity income trusts, then takes a look at some of the more intriguing (and more risky) “off-piste” income options.
If you’re not already a subscriber, then sign up now. You get your first six issues free, as well as a free digital book on the lessons we can learn from previous booms and busts.
Oh, and if that hasn’t convinced you, you might also be interested to know that Dominic Frisby lists some of his favourite gold miners in Friday's issue too. So don’t miss it! Sign up now.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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