We need to talk about dividends, says Alan Livsey in the Financial Times today. He's right; we do.
As he points out, in a normal world, "dividends come out of a company's cash flow once the finance director has figured out how much he or she needs to spend on investment."
So as commodity prices have tumbled and the cash available to producers is less than is needed to sustain dividend payouts, you would expect all dividends to be cut in a hurry. That hasn't happened.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sure, some of the big UK-listed players have cut a bit (Glencore, Anglo and Vale). But others have not. Look at Shell and BP, who pay out around 20% of total UK dividends between them. "In two of the past three years, both of these super majors have had to sell assets to help pay their dividend bill."
Why haven't they been cutting dividends? Livsey doesn't give us the answer. But might it be yet another unintended (and bad) consequence of super low/negative interest rates?
Given the paucity of returns elsewhere, ageing investors across the West have handed their cash and their faith over to income fund managers in the hope of keeping their retirement shows on the road: they have stopped treated equities as growth assets and started treating them like bonds. And while the yield on shares in these companies might be 8% today, it will be much less on the purchase price of most investors.
Perhaps companies know that and they know that when they lose the faith of an income-dependent shareholder (institutional or retail) it is going to be tough to regain. That makes it much harder for them to cut dividends, despite the clear need for them to do so. One more thing for you to add the growing list of perverse effects of bad monetary policy.
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
Value is starting to emerge in the marketsOpinion If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
