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3 ways of dodging the dividend dive

In a momentous sign of the times, oil giant Royal Dutch Shell has cut its dividend for the first time in almost 80 years.

Mark Whitehead Portfolio Manager of Securities Trust of Scotland

Payout rout

In a momentous sign of the times, oil giant Royal Dutch Shell has cut its dividend for the first time in almost 80 years.

Although not entirely unexpected – following the oil price crash, the energy firm is prioritising interest payments on its large debt positions – the move comes amid a flurry of similar cuts and postponements by other companies in the wake of COVID-19.

The UK has been the epicentre of the dividend rout so far, with cuts and postponements to date accounting for a staggering 47% of the total FTSE 350 dividend pay-out last year.1

Beware concentration risk

The current situation has brought to light a risk that we have been highlighting for years. Namely, the excessive concentration of dividend payers clustered in the UK equity market.

In 2020, just 10 FTSE members were forecast to pay out £42 billion in dividends, or two thirds of the expected total, with 20 FTSE members expected to pay out nearly 85% of the total2.

Of course, when a major ‘black swan’ event happens, such as the current pandemic, domestically focused income investors immediately feel the pinch from such narrow band of dividend providers not paying out.

But there are some simple measures that UK dividend-seeking investors can take to help sidestep the worst of the current income drought.

1) Go global

Taking a global approach to income investing allows better access to investment opportunities which are less concentrated in significantly impacted sectors.

As well as helping to diversify risk compared with single-country portfolios – be it in terms of concentration, political or economic risk, a global portfolio also enables you to access to some of the best companies in the world.

These are the types of business that can generate growing dividends long into the future, providing savers with those much-needed returns.

What’s more, going global also enables diversification in the timing of dividend payments, with different regions delivering payments at varying points throughout the year.

The current situation has brought to light a risk that we have been highlighting for years.

2) Avoid cyclicality

Concentration risk in cyclical and regulated sectors in the UK exacerbates the current situation, making it tough to see things bouncing back quickly for companies in these types of sectors.

In industries that are less cyclical and that have less significant regulatory pressure, we expect to see lower levels of cuts and a faster bounce back.

As visibility improves, we would expect companies in these sectors to pay at a higher level through this crisis and for their dividend levels to bounce back more quickly.

Our portfolio has just 5% invested in the prime cyclical sectors energy and banks, thus we expect to continue to generate a strong income stream going forward.3

Safer dividends can still be found in less cyclical sectors or where companies are able to continue to generate revenues during lockdown, consumer staples, utilities and pharmaceutical stocks for example.

Bucking the trend of cuts, portfolio holding P&G – the owner of brands such as Oral-B, Gillette and Pampers – recently declared an increased quarterly dividend, which represents a 6% increase compared to the prior quarterly4.

3) Look for sustainable, structural growth

Another great protection for those who rely on dividends in this uncertain environment is to generate income from companies with strong balance sheets and long-term structural growth opportunities.

We continue to strongly believe that companies with sustainable income credentials should now become highly prized assets and create an exciting opportunity for income investors.

It is interesting to note too, that the yield pick-up on stocks relative to government bonds is now more compelling than at any time over the past fifteen years.

1 Source: J.P. Morgan Cazenove, May 2020.
2 Source: AJ Bell; Sharecast, consensus analysts’ forecasts, Refinitiv data.
3 Source: Martin Currie, as at May 2020.
4 Source: Company information.

Regulatory information and risk warnings

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.

Past performance is not a guide to future returns. Income is not guaranteed and may constrain growth.  The return may increase or decrease as a result of fluctuations in the markets, in currency and/or in the portfolio.

The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.

As shares in investment trusts are traded on a stockmarket, the share price will fluctuate in accordance with supply and demand and may not reflect the value of underlying net asset value of the shares.

Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.