How might the Coronavirus impact dividends and natural income?

24.04.2020
Stuart Lawn
Financial Planning, COVID-19

Whether you are investing in funds purely for growth, or if your portfolio consists of funds which pay out a natural income to you, it is likely that dividends will play a big part in performance.

When you invest in an equity fund, the underlying companies in which the fund manager invests are likely to pay dividends. When reinvested, these dividends can help the growth of your investment capital. As an example, if you’d have invested in the FTSE 100 five years ago and had dividends paid out, you’d have lost just over 17% of your initial capital at today’s prices. However, if you’d have reinvested the dividends of those companies, you’d have made 0.86% in terms of capital growth.

At this time of economic turmoil, it is highly likely that we will see some impact on the dividends companies are able to offer, and in turn this will influence performance of investments.

There are many firms which have been greatly affected by the crisis, and some are even on the verge of collapse. For example, those in tourism and hospitality. These companies might have to reduce their dividend payments or suspend them entirely in order to maintain the cash they need to keep their businesses running.

Some of the bigger companies may well have plenty of cash reserves and be able to maintain their usual dividend payments, but they too are likely to view the uncertainty as a good reason to reduce the payments they make.

With UK banks having already suspended dividend payments, and plenty of companies having to postpone their annual general meetings, the strain is already beginning to tell.

Of course, nobody knows how exactly this will pan out, and it is important to say that the ‘historical yield’ you’ll see listed against a company/fund is based on previous payments, it is not an indication of how much it will pay out over the next year. Although by no means a promise of what will happen this time around, the aftermath of the 2008 financial crisis saw global income fall by 18% (and the UK by 15%). Investing is for the long-term though, and over time we saw both growth and dividend yields return to previous levels, culminating in a long period of good stock market performance.

Fund managers will obviously have to work harder to seek dividend yield in these times, and this is where their expertise might come to the fore. They could seek to invest in companies with strong, consistent balance sheets/cash reserves, and who have not cut their dividends, or simply accept the fact that some of their favoured companies will have cut payments. At the end of the day, the cutting/suspending of dividends is likely to be the best thing for the long-term prospects of the firm.

A similar issue will most likely befall many fixed interest investments, for example Corporate Bond funds. These funds, in essence, see you loaning your capital to businesses in return for a regular rate of interest. This interest can then be paid or reinvested in the same way as dividends.

In these uncertain times, investors will be concerned that these companies, to which you’re loaning money, are now at higher risk of defaulting on these interest payments, or even going into liquidation.

In summary, for those investors who are reliant on a natural income from their investments, you should be prepared that their yield in the coming months will not to be as high as in previous years.

An experienced financial adviser will be able to formulate a strategy to help you through turbulent times such as these. There are many different ways in which you can seek to achieve both growth and income from an investment portfolio. Seeking expert advice can help you find the one that best suits you, potentially lessening the impact of issues mentioned in this article.

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