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Dividend Dilemma

3 April 2020

Those seeking income from the stock market have been dealt an awful blow in the current rout. What began as an understandable move by companies that foresaw a liquidity problem, as businesses are locked down and revenues interrupted, has mushroomed into something much wider. Cancelling or suspending dividend payments has become almost the thing to do. If most people are struggling then so should those greedy shareholders and any company that pays them is held in bad odour. Then came the Bank of England forcing the arms of the UK banks to suspend their dividends despite being amongst the strongest collateralised in the world. At the time of writing around £16bn of dividends have been cancelled or suspended and that was before the European insurance regulator asked insurers and reinsurers to cancel or postpone dividends. The market seems to have developed its own “Me Too” momentum. Any company with the audacity to pay its shareholders an income is, it seems, frowned upon and the regulators have signed up to the movement.

This is madness. At the root of equity investment is an income return either in the present or the future. If there is no potential for that at some point then the investment story becomes a very hard one to sell. The current puritanical assault on crucial income streams is, I feel, being taken too far and will horribly impact pensions and individuals relying on those distributions.

So, stuck between a rock and a hard place, what is the income investor to do? Selling at rock bottom prices seems foolish, succeeding only in crystallising the loss, realising reduced capital and then where does one invest that for a decent income? Frying pan and fire spring to mind! Let’s look at the banks. The only reason they are not paying the dividends is because they have been instructed not to. They are financially able to do so. Don’t think for a minute that just because base rate is only 0.25% that they are not making any money. The BoE is giving them free funds. They will do ok believe me. Dividends not paid are not funds lost although it might feel it at present. Undistributed cash remains on the balance sheet and you still own your share of it. When a share goes ex-dividend the share price effectively gets marked down by the level of the dividend, everything else being equal. Now the share prices have been sold down dramatically because the companies are retaining the dividends. Go figure, as they say.

It might not sound like a solution when the coming months pass with very little dividend income but sometimes it really is best to do nothing. Not all, but a lot of companies will begin to rebuild their dividend distributions once we emerge from this chaos and the banks, I feel, will be able to do so quickly. HSBC and Lloyds are the strongest of our majors and shareholders should certainly hold on in my view and, at some time over the coming weeks they are going to be a long-term steal.


ISA Time

In the current chaos it might not be foremost in investors’ minds but the 6th April offers the opportunity to take full advantage, for another year, of one of the few genuine tax shelters still available. Let’s face it, the current enormous government largesse, needed though it is, will have to be paid for at some point. This will, no doubt, require some considerable fiscal tightening and any unsheltered savings could suffer quite painful taxation. Best squirrel it away while you can.

Letters and forms are being sent out or emailed imminently so please look out for them. They are as important this year as ever.


Russell Dobbs FCSI

Chartered Wealth Manager