Boston - The past few months have sure had their ups and downs as we've settled into our new coronavirus-adjusted reality. Investors who look to dividends as part of their income stream have felt this acutely, navigating headlines such as "How much will your dividends get cut?"1 and "For investors banking on dividends, the 'pain has just begun.'"2
While we are seeing companies in industries from aerospace to banks to energy suspend their buybacks, cut their dividends or look to their respective governments for bailouts, it's important to dig deeper than the catchy doom and gloom headlines to understand the full story.
US dividend suspensions still in the minority
According to Evercore ISI research as of May 15, a total of 31 US companies within the S&P 500 Index have suspended dividends — representing only 2.7% of the index on a market-cap basis.3 The top two sectors were consumer discretionary with 15 and industrials with 6, while consumer staples, energy and healthcare tied for third with 2 companies each. Additionally, only 15 other S&P 500 companies have trimmed their dividend payments through May 15.
These 46 companies that have either decreased or suspended dividends compares to an annual average of 29 companies since 1999 — well below the peak of 85 companies during the global financial crisis in 2009. While company-specific stories may have largely dominated the headlines and received heavy political criticism, the actual counts do not translate to the widespread dividend rout that the media frenzy would have us believe.
Global state of corporate dividends
Looking beyond the US, the facts once again paint a more manageable picture of the current state of corporate dividends. While nearly one-third of STOXX Europe 600 Index members have adjusted their dividends in some way, with many postponing the payment for later this year, there are a few important caveats to that headline number:4
- The driving factor behind these suspensions was not necessarily poor fundamental performance, but rather companies' inability — due to COVID-19 lockdowns and social distancing policies — to hold Annual General Meetings (AGMs) where in-person attendance is required to ratify dividend payments.
- Investors who focus on company fundamentals and evaluate metrics such as net earnings coverage and dividend payout ratios may have identified and avoided many of the companies that cut or postponed dividend payments, significantly reducing the negative impact.
- The pace of these postponements has slowed over the last month, with companies already rescheduling their AGMs as European economies begin to reopen.
Core tenets of a dividend income strategy
With all this in mind, it's important to remind ourselves that the core tenets to any successful dividend income strategy have not changed: fundamental research, diversification and a rules-based approach. We believe strategies that focus on a company's ability and willingness to pay — even under a stressful macro environment — and manage exposures at the company, sector and country level may help to sidestep a lot of the challenges the media has broadcast all too well.
In addition, strategies that employ what's known as dividend capture may be able to take advantage of the resulting increase in yields when markets drop, while still generating the same high level of sustainable tax-advantaged dividend income.
Bottom line: Given all the bad news over the past few months, dividend-focused investors may already have enough to worry about without adding their income to the mix. While the need for thorough fundamental research has increased, these investors still have many levers to pull in our new coronavirus and headline dominated reality.