Jeff Prestridge  

Investment trusts offer sought-after income

Jeff Prestridge

Jeff Prestridge

Dividends make the personal finance world go round and round as smoothly as a carousel in an amusement park spouting out happy tunes and bringing joy to those who sit on its seats.

They are vital for both our pensions – defined contribution or defined benefit, accruing or in decumulation mode – and tax-friendly Isas.

In a nutshell, they are one of the key components behind personal wealth creation.

Without them, wealth creation becomes a darned sight harder.

For the past 10 years or so, company dividends have been one of the few bright spots in a bleak and barren income landscape.

While savings rates have plunged and yields on bonds have remained pretty woeful, the average company dividend has held up remarkably well in absolute terms – often growing year in and year out.

Some investors, I am sure, have been drawn into mining this rich income seam without fully understanding the risks involved.

Sadly, as far as dividends and wealth creation are concerned, the coronavirus has put an almighty spanner in the works (I say that, fully acknowledging that the coronavirus has had far more devastating consequences, but forgive me – I am writing from a financial viewpoint).

Bar the odd exception such as Legal & General and Tesco, UK listed companies have responded to the economic hiatus triggered by Covid-19 by cancelling dividend payments – even when they have already been promised.

Some have done so of their own accord, others, such as the banks (no surprise there), have literally had to be hit over the head with a proverbial frying plan (held by the regulator) before pulling the proverbial plug.

Financial experts now estimate that UK dividends could fall by more than 50 per cent this year.

Link Group’s latest analysis of UK dividends suggests that the dividend ‘loss’ this year could surpass £50bn.

That is a lot of dividend, whichever way you wish to analyse it.

Over the pond, the situation is equally depressing.

Last year, companies comprising the Standard and Poor’s 500 Index delivered almost half a trillion dollars in dividend payments, equivalent to $56 (£44) a share.

This year, the expectation is for equivalent payouts of nearer $40 a share, although I would not be surprised if that number drops even further.

Of course, in most instances, the reticence to pay a dividend has been fully justified.

After all, it would be folly for executives to keep shareholders sweet while jeopardising their company’s ability to survive.

In some cases, however, it seems that companies have withdrawn dividends because of a fear of whipping up a hostile social media storm.

In the current environment, dividends have become somewhat demonised.

For investors, the loss of this dividend stream is a blow.

How long the loss will last for remains anyone’s guess.

Hopefully, it will be short term, but the longer the country remains in lockdown, the greater the chance of widespread corporate failure and the permanent shrinking of the dividend pot. All rather scary.