Over the past fortnight, banks and insurers have axed payouts after the Prudential Regulation Authority and the Financial Conduct Authority called for "restraint" over paying out income amid this crisis.
While this looks to be the responsible thing to do, it had a knock-on effect on share prices and confidence, pushing both lower. For example, banking giant Lloyds' share price at the start of 2020 was over 60p – at the time of writing, it stood at 30.71p.
Adrian Lowcock, head of personal investing at Willis Owen, said: "Clearly we are in extraordinary times, and the banks had little choice but to comply with the wishes of the UK's regulators, but nonetheless this is another hit to investors already reeling from the losses being seen across markets."
Nor are cuts limited to those put under pressure by the regulators. Link's quarterly dividend monitor, published on April 9, noted that 45 per cent of UK companies had cut payouts already this year. In a best case scenario, it predicts UK dividends will fall 27 per cent to £76bn this year – with a worst case scenario seeing a 51 per cent reduction.
And it is not just UK-based companies; globally, earnings have suffered as a result of the Covid-19 induced lockdown, and company boards have been making savings wherever necessary – including shaving or snuffing out dividends – to ensure the fiscal stability of the business.
Jupiter's open-ended fund managers collectively commented that the coronavirus had been "putting an end to the dividend".
Jason Pidcock, manager of the Asian Income fund, said: "There is no doubt there will be a widespread cut in dividends.
"I imagine most companies will cut, but there will be a few who cancel altogether and a few who maintain dividends even in the face of lower earnings by paying from a strong balance sheet, probably where they are in a net cash position.
"Ultimately, dividends have to be funded by earnings, and earnings will be under pressure this year. At this stage we are hopeful that there will be an earnings recovery in 2021, which ought to be positive for dividends."
A note from analyst Peel Hunt said investors looking for income would "have to work especially hard to find it over the coming months."
The Investment Association recently issued a letter on behalf of its institutional investors to FTSE companies' chief executives, which pledged support from shareholders at this time, but also asked company boards to be mindful of investors.
One of the points raised was on dividends. The IA's open letter stated: "Dividends are an important income stream for many savers, pensioners and institutional investors, including pension funds and charities.
"Shareholders ask companies to take into account the suitability and sustainability of a dividend payment in light of current uncertainties. Shareholders expect companies who do decide to suspend dividend payments to restart them as soon as it is prudent to do so.
"Ultimately, shareholders expect companies to be transparent about their approach to dividends, particularly, if they are seeking additional capital."
Who is paying?
But where can investors – whether in accumulation or, perhaps more importantly, in decumulation – get their income fix?
While listed companies are cutting dividends, putting downward pressure on the quarterly or bi-annual income payments from open-ended funds, investment trusts are taking advantage of the special features offered to their status as closed-ended funds. So far, all income-paying investment trusts have announced a dividend, with many offering a rise in payouts.
Last week, the Seneca Global Income & Growth Trust declared a fourth interim dividend in respect of the year ending April 30 2020 of 1.68p per ordinary 25p share. The dividend represented an increase of 1.8 per cent over the previous year.
The board said: "We believe it is right to do what we can to help shareholders through this extraordinary period.
"One of the great strengths of investment trusts is their ability to pay dividends, if necessary or appropriate, out of historically accumulated revenue and other reserves."
The Association of Investment Companies publishes a list of 'dividend heroes', highlighting investment trusts that have been consistently paying and raising dividends over the past 20, 30, 40 and even 50 consecutive years.
Top 10 dividend heroes
Investment company | AIC sector | Number of consecutive years dividend increased | Yield at 13/03/2020 |
City of London Investment Trust | UK Equity Income | 53 | 6.0 |
Bankers Investment Trust | Global | 53 | 2.6 |
Alliance Trust | Global | 53 | 2.2 |
Caledonia Investments | Flexible Investment | 52 | 2.3 |
BMO Global Smaller Companies | Global Smaller Companies | 49 | 1.6 |
F&C Investment Trust | Global | 49 | 2.0 |
Brunner Investment Trust | Global | 48 | 2.9 |
JPMorgan Claverhouse Investment Trust | UK Equity Income | 46 | 5.2 |
Murray Income | UK Equity Income | 46 | 5.0 |
Witan Investment Trust | Global | 45 | 3.2 |
Source: AIC
Can investment trusts continue to pay out? Richard Curling, manager of Jupiter's Fund of Investment Trusts, said he believed so.
He said: "With a 30 per cent cut in the total dividend income likely to be on the cards, it is harder for unit trusts as they have to distribute all the income they generate.
"If the dividend is not coming in, they have to cut their dividends – and if you are running an income fund, it doesn't look great.
"One reason [investment trusts] do better is because they have the ability to smooth dividends over time. A lot of trusts have dividend reserves, which means they can keep paying even when we have a dramatic and sudden shock to the markets, as we have now.
"[They] can also pay dividends out the capital gain, which is one of the great under-rated advantages of investment trusts."
He also cites "reputation" as a driver for trusts continuing to pay out and even raise dividends.
"If you are board member of a trust that has paid out consistently for 30, 40 or even 50 years, you do not want to be the one that trashes a perfect record."
He pointed to research that said investment trusts could continue to pay out for two years and have some reserves left over.
"Suppose the total dividend this year is down 30 per cent, and [investment trusts] increased theirs by a nominal 2 per cent to 3 per cent.
"Suppose on top of that there is another 30 per cent total dividend income cut next year, but [investment trusts] still continued to pay slight increases. [Investment trusts] would still have reserves left over."
Of course, that is the worst-case scenario. But even independent analysts Winterflood agree investment trusts may continue to be the 'dividend heroes' for a while yet, based on their reserve cover and ability to convert capital into income.
Its latest analysis stated: "The level of revenue reserve cover varies greatly, with the median level being 129 per cent, while the median level of dividend cover in the respective funds’ most recent financial year was 107 per cent.
"We believe that the likelihood of any of these AIC dividend heroes not sustaining their dividend growth records is low at present, given the level of revenue reserves, favourable exchange-rate movements and the ability of funds to potentially support their dividends by converting capital into income."
Simoney Kyriakou is editor of Financial Adviser
