ETF provider GraniteShares has reviewed dividend announcements from UK listed companies for the period 19 March to 20 April 2020 and found that around 92 per cent involved cancelling or suspending payments.In total there were around 176 dividend announcements during this period, with 162 companies cancelling or suspending, and just 14 making payments, although some of these were reduced.
The 14 companies that made dividend payments were Chesnara, 888, Winkworth PLC, S&U, Tesco, Tritax Big Box, Greencoat UK Wind, Anglo Pacific, Hilton Foods, Sabre Insurance, Hunting, Ocean Wilson Holdings, Mortgage Advice Bureau and SCS.
Investors will be hit hard by dividends being cancelled or suspended. Reinvesting them and the benefits of compounding means they are one of the most powerful tools available for boosting returns over time.
GBP1,000 invested in an ISA on 31 December 1999 in the FTSE 100 would have delivered capital growth of GBP204 by November 2017, representing an annual growth rate of 1.1 per cent. However, by reinvesting all dividends and with the benefits of compounding, the same GBP1,000 investment in the FTSE 100 would have delivered a notional return of GBP1,193, representing annualised growth of 4.6 per cent. Overall, this represents a difference in returns of either 20.4 per cent or 119.3 per cent.
Will Rhind, Founder and CEO at GraniteShares, says: “The cancellation or suspension of company dividends is hardly surprising given the backdrop of the lockdown and the economic uncertainty caused by the Coronavirus pandemic. Companies need to preserve cash, however the drying up of dividends creates an additional negative feedback loop for the economy adding pressure on those who rely on dividends as a source of income.
“The ability to take positions to profit from prevailing conditions is one way that investors can potentially compensate for lost income. As the implications of the pandemic were understood, we have, for example, seen a pick-up in investors shorting stocks. Our analysis of industry data reveals that in the first half of March, there were 40 per cent more net short positions reported to the FCA than the same period last year.
“Today, sophisticated investors have more tools available to them to hedge against falls across a range of stocks and markets and boost returns from any recovery. Our short and leveraged ETPs are examples of products that enable them to do this.”
Commenting on when investors might expect dividends to start being paid again, Will Rhind says: “Last year, dividends paid by British companies hit an all-time high or GBP110 billion – an increase of 10.7 per cent on 2018. However, given the economic crisis that has resulted from Coronavirus, it is likely to be some time before most companies’ earnings return to pre-pandemic levels. It is only then that we could hope to see dividends returning to their 2019 levels. The reality is that we will probably see more cancellation or reduction of dividends as businesses struggle to preserve cash. Income-seeking investors are likely to be distancing themselves from such companies, while being drawn to those in sectors that have been less affected by the pandemic and still in a position to pay dividends.”