Stay the course: dividend tap will be turned back on

The coronavirus-induced fall in dividends will be more severe than that caused by the global financial crisis, but the pause will be temporary, and investors should stay the course.

That’s the word from Michael Price, portfolio manager of the Ausbil Active Dividend Income Fund, who expects dividend yields to return to pre-covid-19 levels next year.

“Over the next six months dividends may fall slightly more than the GFC as a result of a number of companies suspending their dividends temporarily,” Price says.

“However, we expect them to rebound faster than the GFC in 2021 as dividends are resumed. As an example of this, we have already seen more companies suspend their dividends than occurred during the GFC.

“This indicates that dividend cuts could be quite severe but are expected to be more temporary.”

Scentre Group (ASX: SCG), the owner of Westfield shopping centres, and wealth management group Pendal (ASX: PDL) on Monday added to the growing list of companies pausing or cutting dividends because of the financial havoc wrought by covid-19 and the ensuing economic shutdown.

Scentre Group suspended its outlook guidance for 2020 and will not pay an interim dividend for the half-year to June 2020.

Pendal cut its dividend by 25 per cent to 15 cents a share.

Pendal chairman James Evans told investors the interim dividend of 15 cents per share was lower than usual because of the “uncertainty of potential future impacts on fund flows, markets, client sentiment and economies”.

This comes after Macquarie Group (ASX: MQG) on Friday announced a final dividend of $1.80—50 per cent lower than this time last year, following pressure from the regulator for banks to retain capital in response to the crisis.

Dividend cuts during the GFC

Ausbil’s Price notes that during the global financial crisis in 2008, 63 per cent of companies reduced their dividends and a further 3 per cent suspended them completely.

Dividends paid by the market fell by 16 per cent between 2008 and 2009.

“The peak-to-trough fall in dividends per share was 33 per cent, as new share issuance further diluted the yield received by existing shareholders,” Price says.

The government has spent hundreds of billions of dollars to help shield the nation from the worst of the pandemic.

Deloitte Access Economics forecasts the economy to contract by 6 per cent on a year-average basis in 2020/21 with the unemployment rate set to rise to 8.5 per cent in that year and not returning to five per cent until 2024.

‘Income from shares remains attractive’

Price says investors should “always be prepared” for falls in market values and resist the urge to exit the equity market now.  

“Unfortunately, shareholders should be prepared for a meaningful drop in dividends, especially in the shorter term.

“However relative to other investment alternatives, the income from shares is likely to remain very attractive.

“Going forward from 2021, we expect dividend yields to be largely unchanged from pre-COVID-19 levels. Given the further reductions we have seen in cash rates, this makes income from shares even more attractive relative to alternative income investments.”