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Goodbye to all that: the Footsie’s dividend meltdown

For income investors, ‘perfect storm’ doesn’t even begin to describe the situation.
 
Across the board, dividends are being cancelled – with some yanked just days before payment. As you’d expect, the FTSE 100 is doing slightly better than the UK-focused FTSE 250, but only slightly.
 
Savers? Bank Rate is now just 0.10% – a fifth of what it was even during the dark days of the financial crisis. So it’s no surprise that savings accounts are paying rates of 0.01% and 0.05%.

Bonds and gilts? UK fixed-income yields are on the floor – but at least they’re still positive, unlike yields in a number of countries.
 
Buy-to-let investors? Time and again, you hear of landlords whose tenants have either been laid off or furloughed, and so can’t pay the rent.
 
I haven’t ever seen or experienced anything like this before. And my own memories of adverse economic conditions go back to 1974, as a young economics undergraduate. 

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Goodbye to all that

From my own portfolio, the cuts at a couple of companies have really brought home the scale of the dividend retrenchment: doughty engineering firm IMI, and global banking giant HSBC – the latter at the behest of the Bank of England’s Prudential Regulation Authority, leaving it with no choice but to obey.
 
IMI, like many other companies, sees huge amounts of uncertainty ahead, and – again, just like many other businesses – is taking a number of measures to conserve cash.
 
Even so, IMI is far removed from being a consumer-facing retail, hospitality, or leisure business. Management must be seriously rattled. I can’t blame them. But I’ll sorely miss the income.

HSBC, as I’ve said, had no choice. And again, I’ll miss the income. But given that – last time I looked – its UK operations were responsible for only around 5% of the bank’s global revenues and profits, one can’t help thinking that the Prudential Regulation Authority’s reaction has been a little disproportionate.
 
Certainly, the bank’s many retail investors in Asia are going to be seriously miffed. Going forward, I wouldn’t be surprised if the bank decided to ditch its London listing and base itself elsewhere.

Peak pessimism?

Eventually, all this will pass. In my view, investors must steel themselves for an uncomfortable few months. The recovery, though, could be lengthy.
 
Yes, there are apparent bargains out there – but especially for income investors, judging companies’ dividend sustainability is going to be tricky.
 
That said, the modest rise in the market over the past ten days could prove short-lived. A little over one week on from March 23, when the Footsie briefly dipped below 5000, London is up 10%. But confidence is still shaky.
 
As one fund manager quoted in the Financial Times noted this week, markets might be past peak panic, but they aren’t necessarily past peak pessimism. 

What to do?

Nevertheless, there are things that investors – and especially income investors – might usefully do.

For investors with new cash to invest, present prices have an obvious allure. As entry points go, share prices could certainly go lower. Even so, they’re a lot cheaper than they were in mid-February.
 
And while judging dividend sustainability is difficult, it’s not completely impossible. Likewise, even without new cash to invest, this could be a judicious time for a little portfolio rebalancing.

Safe-looking incomes

Among my own holdings, for instance, are three sustainable energy firms: Bluefield Solar Income, Foresight Solar, and Greencoat UK Wind. They’re investment companies, and so are quoted on the London Stock Exchange, just like any other investment trust or property company REIT.
 
The UK still needs electricity, and I expect their wind farms and solar farms to continue to produce it – and pay RPI-linked dividends in the process.
 
And speaking of REITs, several REITs and infrastructure trusts have the government as a major tenant – and tenants don’t come more secure than that. 

Primary Health Properties, for instance, does what it says on the tin: it rents out primary healthcare facilities, almost 500 of them, the majority of which are doctors’ surgeries.
 
HICL Infrastructure is another business where the government is an important tenant. Schools, hospitals, prisons, fire stations, police stations, central government offices, libraries, Ministry of Defence accommodation – you name it, HICL owns it.
 
In times like these, I’m certainly glad that all these companies are in my portfolio. From a capital growth perspective, they might not set the world on fire – but for dividend dependability, I expect them to prevail.

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Malcolm owns shares in IMI, HSBC, Bluefield Solar Income, Foresight Solar, Greencoat UK Wind, Primary Health Properties, and HICL Infrastructure. The Motley Fool UK has recommended Foresight Solar, Greencoat UK Wind, HSBC Holdings, IMI, and Primary Health Properties. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.