Video: HL experts – where are we now with dividends?

Emma Wall and Nick Hyett face the camera as they use their webcams to videocall from home.

Emma Wall: Hi, I’m Emma Wall and joining me today to talk about dividends and where you can find income for your portfolio is Nick Hyett. Hi Nick.

Nick Hyett: Hello.

Emma Wall: So dividends. It’s been a bit of a bumpy ride for income investors over the last month, hasn’t it?

Nick Hyett: Yeah, I think we’ve seen, in the UK, about a third of FTSE 100 companies now cut the dividend or trim the dividend at least in the short-term. So if you’re a long-term income investor, it’s certainly not been a great time to be invested.

Emma Wall: And the way that we’re thinking about these dividend cuts are that we’re broadly seeing stocks fall into three buckets, aren’t we?

There’s those that have cut the dividend because they’ve had to, because they simply do not have the cash to continue to pay out to shareholders. Those that are cutting the dividend because it’s prudent to do so, so they might have the cash now, but looking further down the line, that capital is best deployed in other ways in order to preserve the company over the medium to long-term.

And then there are stocks that remain able to pay the dividend and, indeed, we expect to continue to pay the dividend, because they have lower or no debt on the books, they’re in a robust position, less affected by the restrictions of coronavirus. So it’s not all bad news, is it?

Nick Hyett: No, and I think one of the things that’s quite important to remember about this is that even some of the companies that have chosen to suspend – in many cases – the dividend now, actually they’re not in a position where they absolutely cannot afford to pay the dividend. Those dividends might well – they’re prudent dividend cuts, they’re not companies which are faced with huge debt piles, necessarily. They’re companies that are making the decision to keep the cash in the business today. Hopefully, if the current lockdowns end up being short-lived, we will see some of that cash eventually make its way back to shareholders and eventually, essentially, turn out to be an abundance of caution.

And I think no management team at the moment is going to worry about being accused of being too cautious. So I think even companies that have cuts – about one in three FTSE 100 companies that have cuts – what we’re not looking at there is necessarily a permanent loss of income. Having said that, it does look like the next six months, and certainly the next couple of months, are going to be tough times if you’re an income investor. But, as you say, there’s another layer of companies – quite a lot of companies really – that aren’t cutting dividends. Some have actively said they’re not going to cut the dividend, and that’s quite a broad mix of companies, and some of the biggest companies in the UK as well. So they contribute a very large proportion of total dividends paid out by the market.

And within that, there’s a couple of interesting sectors, I think, that really stand out. You’ve got oil & gas – both the big oil & gas majors in the UK – Shell and BP – have both said that they will pay out dividends – the final dividends – and have made it clear that they intend to carry on paying dividends for the foreseeable future. Pharmaceutical stocks are at least in theory completely unaffected by this because people still need the medicines they’ve always needed. You’ve got pharmaceutical stocks like AstraZeneca, GlaxoSmithKline – both large dividend payers and contributors to overall market yields. And then slightly less popular, but the tobacco stocks have also indicated they’re likely to carry on paying dividends.

So those three sectors, between them, account for about 46%/47% of the current FTSE all-share market yield. So actually you’ve got big sectors that have already said they will be paying, at least in the short-term.

Emma Wall: And quite a surprise there to see the oil & gas to commit to paying a dividend, given the backdrop of such a significant drop in the oil price. As we’re talking, it looks like there may be some resolution between Saudi Arabia and Russia in controlling supply, going forward, with oil. But we’ve seen significant drops in oil price and share prices for those oil & gas majors, so heartening to see that dividends will continue.

Nick Hyett: Yeah. I think what’s really interesting from the oil majors is what they’ve chosen to do is to forego investment in the short-term in new projects in order to keep that cash coming back to shareholders. But, having said that, Shell have only recently come out today and increased their commitment to improve – well, to become carbon-neutral as a company. So although they are reducing their investment in big oil & gas projects, their investment in energy efficiency and improved renewable energy sources have actually increased over this period. So what these companies are able to do – and I think this is a great sign of what they’re able to do – is generate a huge amount of cash.

And that gives them options when times are bad and that’s something that most investors – ourselves included – will tell you is that cash is really important. A company which generates a lot of cash has options – it can choose to pay a dividend, it can choose to re-invest. And I think that’s what we’re really seeing with the oil majors at the moment, despite what are really tough times. The oil price is at all-time lows and some very close to all-time lows – or more recent lows anyway. Despite that, they’re still able to generate a huge amount of cash and that gives them options.

Emma Wall: I think, because we’re talking about options, it’s also important to note that the UK is not the only place that you can find dividend-paying stocks. We bang on about the importance of diversification a lot and there’s a reason why we do it, because it does mean that you can spread your risk and get income and growth from various different places. When we’re looking at income, it probably was true to say, in the past, that the UK is one of the few places that you could find dividend-paying stocks, but increasingly you can find sustainable yields in other countries as well, can’t you?

So if you are looking at ways to diversify your income stream, you’re looking at places to put new money for the new tax year, global might be an option.

Nick Hyett: Yes, I definitely think it is and I think one of the other things to bear in mind when it comes to looking at global income options is that the UK is a really small market, it’s a small percentage of the overall stock market, globally. There are just a lot more options out there when you start looking beyond home – the domestic market. And I think that is one of the real strengths of working internationally. In the US, in particular, there are companies – big, global, international companies – Coca-Cola, McDonald’s, the big tech stocks.

Some of them, including Apple, for example, pay very large dividends and have done for a very long time. Some of them will be cut, as like we’ve seen in the UK, but some will survive and I think looking beyond the UK gives you a lot more options to choose from.

Emma Wall: Now, there’s no going two ways about it, people will see a drop in their income in the following six months if they are reliant on dividends for that income. We think particularly those that are vulnerable to these cuts are those in retirement who rely on that natural income, that natural yield for their household income. What are we saying to those households now? Because, unlike people who are lucky enough to still be in work, they may not have other abilities to generate income.

Nick Hyett: I think this is – there’s no two ways about it, this is a difficult time if you’re relying on income from your investments. The yield on the market is going to be lower this year than it was last. That means, unfortunately, that people are going to have to make difficult decisions. The upside of everyone being locked in homes is that this is probably as good a time as any to really look at your outgoings and look at where you can trim.

I think that, unfortunately, there is no getting away from this, this is going to be difficult, this is a time when people probably need to dig into cash savings if they’ve got them and also, as I say, need to look at outgoings. Having said that, the yield on stocks is still not insignificant, and as I said, there are quite a few large companies out there which will pay a dividend this year. But there’s no getting away from the fact that it is going to be a tough six months for income investors.

Emma Wall: Nick, thank you very much.

Nick Hyett: Thank you.

This video is not personal advice or a recommendation to invest. If you are unsure about the suitability of an investment please seek advice. Investments and their income can fall as well as rise in value and you could get back less than you invest. Yield are variable and are not a reliable indicator of future income, Past performance is not a guide to the future.

Any comment on individual companies is not a recommendation to invest.

Views correct as at 16 April 2020.