November 28, 2021

Earn Money

Business Life

Why investors should not ditch their dividend-cutting income stocks

Income investors have been hit hard by the stock market chaos and economic uncertainty. Dividends have been cut left, right and centre, leaving retirees strapped for cash and forced to move savings elsewhere.

Many have wondered whether they should remain owners of incomeless companies, particularly if share prices could struggle this year. But those who hold on, or buy back in quickly, could be rewarded for their patience as early as next year, experts have said.

Businesses have stopped, cut or suspended more than £29bn in payouts so far this year, according to AJ Bell, the fund shop, holding back cash to support themselves through the economic slowdown. Link Group, a research firm, estimated that anywhere between 38pc and 52pc of the £100bn paid out in dividends last year could vanish in 2020.

Britain’s stock market investors are particularly dependent on dividends. The FTSE All Share index, a broad measure of share prices, has fallen by 14pc in the past five years. But when dividends are factored in, investors would have made a 5pc profit.

Despite the carnage, experts believe the lacerated income market will soon heal. Adrian Frost, a fund manager at Artemis, said the motives of businesses that had cut or suspended dividends fell into one of three categories: financial necessity, prudent planning and requests by the regulators, in the case of banks and insurers.

Companies in the first group are unlikely to return to paying dividends soon, he said, as cash flows would be too fragile. However, those in the other categories should resume their payouts once lockdown ends and society and the economy return to some form of normality. “We suspect that many of the cuts and cancellations will be dividend ‘sabbaticals’ and that 2021 will see a strong bounce in payouts,” Mr Frost said.

Stocks that made their name as income stalwarts will be keen to resume payouts before income-seeking shareholders ditch them for good. The likes of Shell, which last month announced its first dividend cut since the war, will require a significant rise in the oil price and economic growth before coming back. But others, such as banks, housebuilders and retailers, will be eager to make this a short hiatus.

Mark Whitehead of the Securities Trust of Scotland, a listed fund, said as much as half of all the affected dividends could be back in 2021. This would not be an immediate return to 2019’s record-breaking £100bn dividend haul, but could represent close to 80pc.

Simon Gergel of the Merchants Trust was even more optimistic. He said he expected firms to restart dividend payments by the end of the year if restrictions were gradually lifted and the economy returned to normal.

“We should see some businesses that struggled start to post profits and then there will be scope for dividends to be reinstated,” he said.

The stock market sectors most likely to keep paying dividends

But such a development could cause problems for investors who have already sold. Companies quick to resume payouts are likely to become prized assets and enjoy share prices much higher than after they cut their payouts. Investors who sold could find the stocks significantly more expensive to buy back.

James Lowen of JO Hambro, the fund group, said investors should be buying former dividend-paying stocks that have strong balance sheets – indicated by low debt and plenty of cash – soon, before they become too expensive. These firms cut dividends only as a precaution and are likely to be the first to return.

“A number of companies have made this clear in their public statements, such as advertiser WPP, housebuilder Galliford Try and recruiter Page Group,” he said.

The top 20 biggest dividend-cutters

Bryan Somers, 75, from County Down, has been following such a strategy. Used to getting a steady income from dividends, this year he said companies had been “put to the sword”. He earned around £20,000 from dividends last year, which he reinvested into shares, but said he now expected that sum to fall by at least half.

“Banks are no longer allowed to pay dividends and even insurers and oil firms have cut payouts,” he said. “As well as this, my portfolio is down by around 20pc – I think it could be five years before things get back to where they were.”

Mr Somers said he was investing in firms with large cash reserves, such as housebuilders. These will be in a better position to sustain payouts to shareholders, he said.

Source Article