In The Picture
In this video, Lauren Smith, Investment Communications Executive, reviews recent events on markets and looks ahead to what’s in store.
As companies tighten their belts in the face of the uncertainty created by the coronavirus, estimates for dividend cuts across the globe this year range from 25% to 50% compared to 2019.1
Thankfully, dividend bear markets – where they fall by at least 20% – are rare. In fact, looking at the US stock market as represented by the S&P 500, it’s only happened six times in nearly 150 years, compared with 16 bear markets for total returns.2
There has only been one other since the end of World War II – during the financial crisis after 2008 – when dividends fell by 24%.3 These are indeed extraordinary times.
Of course, companies don’t like cutting dividends because it sends out a negative signal about their future prospects. But further bad news for investors is that dividend bear markets typically last longer than those for total returns – 4.8 years on average compared to 1.5 years.4 This makes sense, because share prices tend to react ahead of improvements in the economy, whereas dividends only recover after companies’ finances pick up.
How long will that take? It is unlikely that economic activity will return to anything like normal for some time, and that will limit the scope for a rebound in dividends in the near term. Indeed, markets are pricing in more declines in 2021; and we may see greater divergence in pay-outs as stronger companies recover more quickly and are able to grow dividends again.
However, the dividend cuts this year have been fast and comprehensive, and not a drawn-out affair. Investors hope this signals a dividend bear market that is shorter than average this time – as happened in 2008–10.
In the meantime, investors need to consider the alternatives. Government and corporate bond yields have plummeted. Latest figures show that average no-notice cash rates fell last month at their fastest rate in eight years5, as the impact of the government’s latest Term Funding Scheme started to be felt; average notice rates for ISA and non-ISA cash accounts are the same – for the first time ever.6
These are challenging times for income-seekers but, over the long run, dividends will continue to play a vital role in helping investors meet their objectives.
|S&P 500 Index discrete one-year returns|
|Apr 2019 – Apr 2020||Apr 2018 – Apr 2019||Apr 2017 – Apr 2018||Apr 2016 – Apr 2017||Apr 2015 – Apr 2016|
Source: Financial Express. Data shown is for the S&P 500 Total Return Index.
Past performance is not a guide to future returns.
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1, 2, 3, 4, Schroders, May 2020
5, 6, Moneyfacts, May 2020
A rally in industrial and energy stocks at the start of last week excited investors. The Dow Jones closed above 25,000 points for the first time since early March, logging the largest two-day advance in a month. The resurgence of cyclical stocks – which are more economically sensitive than defensive sectors such as healthcare and technology – suggested that the global economy may have turned a corner.
On Tuesday, the European Commission proposed a recovery package worth €750 billion. The package, which requires unanimous approval from EU member states, has considerable ramifications. It significantly increases economic integration in the European Union: the money will be taken as common debt, and issued to the regions and industries in the EU that have been hit hardest by the virus, and repaid through EU-wide taxes over the next 30 years. The package signifies a mutualisation of European debt that takes the bloc closer to something like a federal union.
In England from today, children of some year groups will return to school, groups of six can gather outside, and some non-essential businesses will start to reopen.
The Last Word
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Barack Obama on the death of George Floyd.
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The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
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