Some companies are attractive for their dividend. Recently, after such sharp falls in share prices, dividend yields have soared, in some cases dividend yields went over 10 per cent. Then they were cancelled.
Dividends have been cut, in many cases cancelled. What can investors do?
It is almost easier to look at the companies that have not cancelled dividends — Tesco, for example. It has increased its dividend and in the process run into a storm of protest. ‘How can it be right?’ ask the critics. ‘It has after-all received around £600 million in state aid’, they argue.
Look at this way. Companies are putting staff on furlough, and they can receive interest free loans from the government. How can it be fair that, despite this, they are still paying out dividends?
The counter view is that the government support is akin to a tax cut, and that furlough is the government’s decision. Companies would otherwise have laid off staff.
The FT quoted Neville White, head of responsible investment policy at fund manager EdenTree, saying food retailers “need to look after their people and reward those people for the work they have done during this difficult time. [If they do that first,] I don’t see why they shouldn’t pay a dividend.”
Here is the problem with these arguments in favour of maintaining a dividend. If there were no government support/bailouts, no furlough schemes, and capitalism was left to blow its full gales of creative destruction, aggregate demand across the economy would collapse, and many companies, that under different circumstances would pay dividends, would go bust.
The government schemes then have already preserved shareholder value — in the sense that without them, investors may have lost everything.
If you are retired, and rely on income from shares to get by, then I have utmost sympathy. The government should support people in this position, subject to certain conditions.
Remember, however, these are tough times for all of us. Unemployment is rocketing. People are being put on furlough, but many of these people will be worse off. People who rely on dividends to survive should be supported. People who use dividends to top up income, maybe should not be supported so much — it depends.
You could argue, I suppose, that we are seeing a shift in income distribution from people who rely on dividends to people who rely on wages. But let’s not overdo this statement. To reiterate from above, shareholders are still effectively being bailed out.
What lessons can we learn?
This experience emphasises the importance of diversification. Don’t put all your money into equities, don’t solely rely on dividends from equities to fund your retirement.
Of course, one day, and I am increasingly uncertain of when that day will be, equities will bounce back. I am pretty sure that most of the companies that have recently cancelled dividends today will re-introduce them at a future date. In some cases, future yields, in say three years time, may indeed be worth more than 10 per cent of current share price.
But there could be quite a wait, first.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees