Robin Geffen: dividend cuts aren't all down to Covid

Robin Geffen, fund manager, Liontrust

Investors shouldn’t blame all of their dividend income problems on this “very challenging year”, veteran fund manager Robin Geffen tells Morningstar. “The seeds of this whole issue of dividend cuts and cancellations” were sowed many years ago, as exposure to individual “dividend risk” became too extreme.

More and more funds were “clustered in a very small group of high-yielding stocks that were basically paying dividends they couldn’t afford”. This included the big FTSE 100 dividend stalwarts such as the banks (Barclays, NatWest, Lloyds, HSBC) and others such as Vodafone and BP that paid “unsustainably high dividends” and “weren’t reinvesting in their own future”, says Geffen. When they “hit the buffers”, payouts were slashed.

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The crisis shows that investors need to pay more attention to dividend cover, leverage and cash, and to focus on “dividends that can repeat and grow”. Geffen has nearly 25% of his fund in tech stocks, such as Apple, Mastercard, Microsoft and Visa, which are “remarkable companies… many of them have virtually no debt… and have incredibly high dividend cover”.

Of course, that high dividend cover implies that many could be paying out more than they are, and that should happen: “I believe that [firms] like Amazon and Alphabet will start paying dividends because they are generating so much cash.” But it’s equally important that “they’re continuing to invest in their own future… making that investment in order to carry on growing at these astonishing rates”.