Income investing has become a minefield in recent weeks. Crashing corporate earnings and an uncertain outlook for the global economy in 2020 (and beyond) mean that dividends continue to fall across the FTSE 100 and elsewhere.
The extent of the problem is reflected in a fresh Janus Henderson report released on Monday. In its latest Global Dividend Index, the asset manager predicts that total rewards could slump by as much as 35% (to $1.21trn) year-on-year in 2020. Even its rosiest estimates suggest that the worldwide total could drop 15% from 2019 levels, to $933bn.
In better news, Janus Henderson says that it expects dividends “to recover some of the lost ground in 2021.” But of course, payments will be coming from the lower base created this year. The pandemic will clearly take a heavy toll on investors’ income flows in the near term and after.
Bank dividends to bomb?
Janus Henderson predicts that British companies will be some of the biggest dividend slashers on the planet too. It says that “the UK has a number of sectors whose dividend outlook is impacted by the pandemic.” It comments that “UK dividends are heavily reliant on a few very large companies, so the risk is very concentrated here”.
Take the banks as an example. On the one hand Janus Henderson notes that “banks in most major economies are in a stronger position this time around, and regulatory oversight is more robust,” compared to the last banking crisis. And banking dividends should therefore recover more quickly than they did during the 2008/09 crisis.
But recent Bank of England advice means that dividends from UK banks are on shaky ground. Janus Henderson notes that Threadneedle Street has requested that banks not pay dividends in 2020. It’s a development that will have huge ramifications for total dividends generated from these shores. FTSE 100 bank HSBC was the 10th best-paying share in the world in 2019, according to the asset manager. Lloyds and Barclays have also been generous dividend stocks in recent times, of course.
More danger… and what I’d do now
Investors don’t just need to fear falling bank dividends, however. Threadneedle Street has asked insurance companies to keep a lid on shareholder payouts too, Janus Henderson notes. It adds that mining companies are highly-tuned to a sharp slowdown in the global economy. Footsie-quoted Glencore has already cut the dividend.
Janus Henderson also suggests that oil may finally reset payout policies in a landscape of lower energy prices. It notes that BP has held its payout, but that Royal Dutch Shell has scythed its own dividend down by almost two-thirds. According to its figures, Shell was the number one dividend payer on the planet in 2019.
So should we all stop buying shares? Not at all! It’s clear that investors need to be more careful than usual when picking stocks to fund their income flows. It doesn’t mean, in my opinion, that they need to stop investing entirely. There are still plenty of stocks out there that could pay big dividends this year and beyond. And following bouts of fresh selling, there are many I would consider too cheap to miss right now.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.