There is light at the end of the Covid tunnel for investors needing income.
Many have been hit hard given the corporate rush to either cut or suspend dividends.
It is reckoned that 2020 dividend payments will be around 40 per cent less overall than they were in 2019.
Financial pundits though believe 2021 will be much better.
Fidelity analyst Alice Logue said: “Many experts are not expecting dividend pay-outs in 2021 to get back to 2019 levels, or to get back the loss seen in 2020. Nevertheless, as more industries return to work and businesses begin to restart their progressive dividend policies, the dividend situation is expected to markedly improve.”
However, there may be a tail of underperformers who will want to shore up balance sheets before they consider a resumption, while others could grab the chance to rebase rewards to shareholders.
“Some businesses might see this as an opportunity to change their approach altogether. The pandemic could make some think differently about how they pay dividends in the future.”
Notably, it has been suggested the likes of BP and Shell might consider taking a lead from certain mining stocks by adopting a payout ratio system – a percentage of earnings – rather than an absolute level of dividend.
Looking back on the coronavirus carnage, Ms Logue went on: “As virus containment measures stepped up around the world, many businesses faced (and still face) prospects of a significant drop in revenue, or no revenues at all, while still facing recurring fixed costs – rents, wages, leases. This has placed a notable drag on working capital and liquidity positions.”
Some of the first to slash dividends were retail, media, travel and leisure. Construction and house building followed and the financial sector was also caught up in the chaos.
Ms Logue added: “On the positive side, there have been many UK companies who have continued and even increased their dividends through this period.
“For example, the UK pharmaceutical giants have seen their revenues unaffected and have continued to maintain their dividend policies. Food retailers have benefitted and some large personal goods companies have also managed to weather the Covid storm.”
There is good news too for those holding bank shares.
The Bank of England’s Prudential Regulation Authority (PRA) has given lenders the go-ahead to resume dividend payments, nine months after it forced a suspension in a bid to preserve capital.
Concluding there was now scope for banks to recommence distributions to shareholders “within an appropriately prudent framework”, it laid out guidelines to determine the size of any pay-out. The regulator set a dividend limit of 25 per cent of a bank’s cumulative profits over the previous two years or 0.2 per cent of its risk-weighted assets – whichever is the higher.
It is thought most banks are keen to resume dividends. Announcements are normally made in February alongside full year results.
So, in summary, what does the future look like for dividend-paying companies?
Ms Logue said: “In the longer term, some economists and analysts expect companies to maintain even more resilient balance sheets, with less debt and more cash.
“It is possible we see consumer-facing companies seeking to strengthen and bolster their balance sheets rather than paying out so many special dividends or doing buybacks. Already we have seen those companies with more conservatively managed balance sheets being rewarded with higher stock prices. Furthermore, those companies who have not taken Government support and are still paying their dividends may be the ones that are more sought after.”
With vaccination programmes already under way, something of a ‘shot in the arm’ for investors, one might say.