For a long time, there’s been a very strong case for investing in dividend stocks. In the past, dividends have been a powerful wealth-building force, particularly during bear markets, where they’ve enabled investors to buy more shares at lower prices.
Recently however, dividend investing strategies have come unstuck. In the wake of the coronavirus outbreak, a whole host of FTSE 100 dividend payers have suspended their payouts. That means those who invest for divis have been left high and dry. Is it game over for dividend investors, then? Here are my thoughts.
Dividend crisis
There’s no doubt the coronavirus – a classic ‘black swan’ event – has resulted in a dividend crisis. In the space of around six weeks, over a quarter of the companies in the FTSE 100 index have suspended their payouts, which is unprecedented.
There are many big names on the list of dividend cutters. For example, Lloyds, HSBC, Barclays, Centrica, Glencore, and ITV have all suspended their payouts.
There are also many highly reliable income stocks on the list. There’s WPP, which had paid a dividend every year since 1999. Then there’s Bunzl, which had increased its payout every year for over 20 years.
Overall, it’s a grim situation. And most analysts seem to agree the situation is likely to get worse in the weeks ahead.
Think long term
Long-term investors should not panic. Assuming the coronavirus crisis doesn’t send us into a long-lasting depression, many dividend payers are likely to resume their payouts in the not-too-distant future.
We may see some rebasing (payouts lowered), due to the fact some companies were paying out more than they could afford to. However, there’ll be companies that pick up where they left off when it comes to payouts.
I think the key is to not focus too much on 2020 payouts, given the extreme circumstances. Instead, look at future income potential. As analysts at UBS said recently in a note to clients: “It may be more useful to focus on the ability of companies to pay dividends going forward rather than simply how they act in 2020.”
A takeaway for all dividend investors
One key takeaway from this setback is that dividend investing isn’t as straightforward as it seems. I think it’s fair to say many investors, myself included, have become too complacent in relation to sources of yield in the recent bull market.
Cyclical stocks, such as the banks and housebuilders, make risky dividend plays due to the fact their earnings fluctuate.
Ultimately, the best companies to invest in for dependable dividends are those that are financially robust, can generate reliable earnings irrespective of economic conditions, and are growing at a healthy rate. Unilever is a good example. I’d be very surprised if it cuts its divi in the coronavirus crisis (although we can’t rule it out).
You may have to pay a higher valuation for a reliable dividend payer, like ULVR, and its yield is never going to be as high as other dividend stocks. However, what you get is reliability. At times like this, that’s priceless.
