It now appears that 2020 will see the biggest hit to dividends in generations, with some commentators saying it could take until 2026 for dividends to return to their 2019 level.
Covid-19 caused unprecedented cuts in dividends in Q2 2020. People sat up and took notice when Shell took a knife to its world-beating payout, cutting it by two thirds, the first reduction it has made since the Second World War.
According to today’s figures from Dividend Monitor from Link Group dividends were down £22bn on a headline basis; they fell £16.4bn on an underlying basis (i.e. if special dividends are excluded). 176 companies cancelled payouts and 30 more cut them, together representing three quarters of Q2 payers. This compares with two fifths of companies that cut or cancelled payouts during the financial crisis.
Many retirees count on dividends to deliver cash flow and reliable income growth and those relying heavily on those payments may have to rethink their retirement income strategy.
Some of those approaching retirement may have to put it off altogether for now.
With many people finding themselves unexpectedly out of work, these dividend cuts could also serve to be a secondary hit for the finances of some with investors with portfolios relying heavily on dividend income finding they have less to fall back on then they may have thought.
On the face of things, the cuts were made to protect balance sheets in the face of strong economic headwinds. However, it seems that some companies are taking the opportunity that the pandemic has provided to reset their dividends at a lower, more sustainable level from which they can start to rebuild.
The short-term pain being felt by those currently close to retirement (and those other investors needing cash in the near term) could be the long-term gain of the markets as a whole as this reset of dividend levels could help create healthier companies for the future.
Brandon Consulting Services Ltd 